RIZAL COLLEGE OF TAAL
Calle G. Marella, Taal, Batangas 4208
Related Standard
PAS/IAS 16 – Property, Plant and Equipment
Nature and Definition of Property, Plant and Equipment
(IAS 16, par. 6)
Property, Plant and Equipment (PPE) are tangible items that:
1. Are held for use in the production or supply or goods
or services, for rental to others, or to administrative
purposes; and
2. Are expected to be used for more than one period.
Initial Recognition (IAS 16, par. 7)
The cost of an item of property, plant and equipment shall
be recognized as an asset only if:
1. it is probable that future economic benefits associated
with the item will flow to the entity; and
2. the cost of the item can be measured reliably.
Initial Measurement
An item of PPE is initially measured at cost. The cost of an
item of PPE includes the following:
1. Its purchase price, including import duties,
nonrefundable purchase taxes, after deducting trade
discounts and rebates.
2. Any costs directly attributable (or related) to bringing
the asset to the location and condition necessary for it
to operate in the manner intended by the management.
3. The initial estimate of the cost of dismantling and
removing the asset, as well as restoring the site where
the asset is located, for which the entity incurs an
obligation by acquiring or using the asset other than to
produce inventories.
The cost of an item of PPE is the cash price equivalent at the
recognition date. If payment is deferred beyond normal
credit terms, the difference between the cash price
equivalent and the total payment is recognized as interest
over the period of credit unless such interest is capitalized
in accordance with PAS 23 Borrowing Costs.
Cessation of Capitalization of Cost
Recognition of costs in the carrying amount of an item of
PPE ceases when the item is in the location and condition
necessary for it to be capable of operating in the manner
intended by management.
The following are not included in the carrying amount of
PPE:
1. Cost incurred while an item capable of operating in the
manner intended by the management has yet to be
brought into use or is operated at less than full capacity.
2. Initial operating losses.
FINANCIAL ACCOUNTING AND REPORTING
PROPERTY, PLANT and EQUIPMENT
3. Cost of reallocating or reorganizing part or all of entity’s
operations.
Directly Attributable Costs
- Cost of employee benefits arising directly form the
construction or acquisition of the item or property,
plant, and equipment.
- Cost of site preparation.
- Initial delivery and handling costs.
- Installation and assembly costs.
- Costs of testing whether the asset is functioning
properly.
- Professional fees.
Cost not Qualified for Recognition
- 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 customers (including costs of staff
training).
- Administration and other general overhead costs.
Capitalizable Costs on Specific Items of PPE
1. Land
- Purchase price
- Legal fees and other costs for establishing clean
title
- Broker or agent commission
- Escrow fees
- Fees for registration and transfer of title
- Costs associated with relocating or reconstructing
property owned by others to acquire possession
- Mortgages, encumbrances, and interest on such
mortgages assumed by buyer
- Unpaid taxes up to date of acquisition assumed by
the buyer
- Cost of land survey
- Payments to tenants to induce them to vacate the
land to prepare the land for its intended use but not
to make room for the construction of new building
- Cost of permanent improvements such as cost of
clearing, cost of grading, levelling, and landfill
- Cost of option to buy the acquired land
- Special assessments paid
2. Land Improvements
Land improvements that are not subject to depreciation
are charged to the Land Account.
- Cost of surveying, clearing, grading, levelling, and
landfill.
- Cost of subdividing, and other costs or permanent
improvements.
Mike C. Buceta, CPA | Property, Plant and Equipment | 1
 Land improvements that are subject to depreciation are
charged to the Land Improvements Account and should
be depreciated over its useful life.
- Fences
- Water systems
- Drainage systems
- Sidewalks
- Pavements, and cost of trees, shrubs, bushes, and
other landscaping
3. Building
By purchase – the following costs are included in the
initial cost of the building:
- Purchase price
- Legal fees and other costs incurred in connection
with the purchase
- Unpaid taxes up to date of purchase assumed by
the buyer
- Interests, mortgage, liens and other encumbrances
on the building assumed by the buyer
- Payments to tenants to induce them to vacate the
building
- Any renovating and remodeling costs incurred to
put the building purchased in a condition suitable
for its intended use
By self-construction - the following costs are included
in the initial cost of the building:
- Materials used, labor employed, and overhead
incurred during the construction process.
- Building permit or license.
- Architect/Professional Fees
- Excavation Fees
- Cost of temporary structures used as construction
offices and tool or materials storage.
- Interest on construction loans and insurance
premiums incurred during the construction period.
- Service equipment and fixtures that were made a
permanent part of the structure.
- Cost of temporary safety fence around the
construction site and cost of subsequent removal
thereof.
Lumpsum Purchase
The acquisition cost of a group of items of PPE acquired on
a lump-sum price (basket price) is allocated to the individual
assets based on their relative fair values at the date of
purchase.
- If the old structure/building is still usable, the single
cost is split between land and building, based on
their relative fair value.
- If the existing structure is no longer usable, the
single cost is allocated solely to the land.
Demolition Costs
The accounting treatment for demolition costs depends on
the reason for the demolition.
➢ When the old building is demolished immediately to
make way for the construction of a new one:
- If the new building is accounted for as property,
plant and equipment, or investment property, any
allotted carrying amount of the usable old structure
as recognized as loss. If it will be classified as
inventory, then designated carrying amount is
capitalized as cost of new building.
- Whether the new structure is accounted for as
property, plant and equipment, investment
property or inventory, the demolition cost is
capitalized as part of cost of new building.
- If the old building is demolished to prepare the land
for the intended use but not to make place for the
construction of new building, the demolition cost is
capitalized as part of cost of land.
➢ When the old building is demolished at a later period to
make way for the construction of new one:
- Whether the new building is property, plant and
equipment, investment property or inventory, the
carrying amount of the previous structure is
recognized as a loss.
- Whether the new building is accounted for as
property, plant and equipment, investment
property or inventory, the demolition cost is
capitalized as part of cost of new building.
- If the old building is leased, any settlements made
to tenants to induce them to vacate the old building
will be capitalized as cost of the new building.
4. Machinery
- Purchase price
- Freight, handling, storage, and other acquisition-
related costs such as insurance while in transit
- Cost of installation, which includes site preparation
and assembly
- Cost of a safety rail and platform around the
machine, as well as the cost of a water-cooling
system.
- Cost of testing and trial runs, as well as other costs
associated with getting the machine ready for its
intended use.
- Fees paid to experts for advice on machinery
acquisition.
- Initial cost estimate for dismantling and removing
the machinery, as well as restoration of the site
where it is located and for which the business has a
current obligation.
5. Equipment
- Purchase price
- Freight, handling, storage, and other acquisition-
related costs such as insurance while in transit
- Cost of installation, which includes site preparation
and assembly
- Cost of testing and trial runs, as well as other costs
associated with getting the machine ready for its
intended use.
Mike C. Buceta, CPA | Property, Plant and Equipment | 2
Subsequent Expenditures on PPE Modes of Acquisition of PPE
- If the expenditure has probable future economic - Cash basis
benefits along with the cost will flow to the entity and it - Deferred/Installment basis
can be measured reliably, subsequent expenditures - On account with available cash discounts
shall be capitalized as part of the cost of PPE. - Issuance of share capital
- Issuance of bonds
- If the expenditure does not increase the future service - Lump-sum purchase
potential of the PPE and merely maintains the existing - Exchange
level of standard performance, such cost shall be - Trade-ins
accounted for as an outright expense. - Donation
- Self-construction

Summary of relevant accounting concepts and initial cost basis under each mode of acquisition of PPE

Mode of Acquisition Initial Cost Basis

Cash Basis Cash Price Equivalent XXX
Add: Directly Attributable Costs XXX
Initial Cost XXX

Journal Entry:
Property, Plant and Equipment XXX
Cash XXX
Deferred/Installment Basis Cash Price Equivalent XXX
Add: Directly Attributable Costs XXX
Initial Cost XXX

Notes:
- The difference between cash price equivalent and the total payment shall be
recognized as interest expense over the credit period.
- In case the cash price equivalent is not available, compute the present value of the
future cash flows using an imputed interest rate.

Journal Entry:
Property, Plant and Equipment* XXX
Discount on Notes Payable / Interest Expense XXX
Notes Payable XXX
*Cash Price Equivalent
On account with available Invoice Price XXX
cash discounts Less: Cash Discount* XXX
Initial Cost XXX
*Whether taken or not
Issuance of share capital The property shall be initially measured in the order of priority:
1. Fair value of the property received
2. Fair value of shares issued
3. Par (or stated) value of shares issued

Journal Entry:
Property, Plant and Equipment XXX
Share Capital XXX
Share Premium* XXX
*Will recognize only if the PPE will be valued above par (or stated) value of the shares issued.
Issuance of Bonds The property shall be initially measured in the order of priority:
1. Fair value of bonds issued
2. Fair value of the property received
3. Face value of bonds issued

Journal Entry:
Property, Plant and Equipment XXX
Share Capital XXX
Share Premium* XXX
*Will recognize only if the PPE will be valued above par (or stated) value of the shares issued.

Mike C. Buceta, CPA | Property, Plant and Equipment | 3

 Mode of Acquisition Initial Cost Basis
Lumpsum Purchase The lump-sum price (basket price) is allocated to the individual assets based on their
relative fair values at the date of purchase.

Journal Entry:
Property, Plant and Equipment 1 XXX
Property, Plant and Equipment 2 XXX
Cash XXX
Exchange General Rule: At fair value of the property received.

With commercial value:

Fair value of PPE given-up XXX
Add: Amount of cash paid XXX
Less: Amount of cash received XXX
Initial Cost* XXX
*Equal to the fair value of PPE received

Journal Entry:
Property, Plant and Equipment (new) XXX
Cash XXX
Accumulated Depreciation XXX
Loss on Exchange XXX
Property, Plant and Equipment (old) XXX
Gain on Exchange XXX
Cash XXX

Gain or loss on exchange is recognized if the exchange transaction has commercial

substance.
Fair value of PPE given-up XXX
Less: Carrying value of the PPE given-up XXX
Gain (Loss) on Exchange XXX

Without commercial value:

Carrying value of PPE given-up XXX
Add: Amount of cash paid XXX
Less: Amount of cash received XXX
Initial Cost* XXX
*Equal to the fair value of PPE received

Journal Entry:
Property, Plant and Equipment (new) XXX
Cash XXX
Accumulated Depreciation XXX
Property, Plant and Equipment (old) XXX
Cash XXX

Gain or loss on exchange is not recognized if the exchange transaction has no commercial
substance.
Trade-Ins Fair value of PPE given-up XXX
Add: Cash Payment XXX
Initial Cost of New PPE XXX

In case of fair value of property given up is not available, the initial cost of the new PPE will
be computed as follows:
Trade in value of PPE given-up XXX
Add: Cash Payment XXX
Initial Cost of New PPE XXX

Mike C. Buceta, CPA | Property, Plant and Equipment | 4

 Mode of Acquisition Initial Cost Basis
Donation When an item of PPE is received through donation, the asset is recorded at the fair value
when received or receivable considering the source of donated asset:
1. From Shareholders
- The fair value should be credited to donated capital.
- Expenses incurred in connection with the donation such as payment of registration
fees and legal fees shall be charged to the donated capital account.
- Directly attributable costs incurred such as installation and testing cost necessary
to bring the donated asset to the location and condition for its intended use shall
be capitalized.

Journal Entry:
Property, Plant and Equipment XXX
Cash* XXX
Donated Capital XXX
*Credited for payment of costs and expenses related to the donated asset.

2. From Non-Shareholders
- The fair value should be credited to income (if no restrictions) or liability (if
restrictions) until the restrictions are met. If the restrictions are met, the liability
shall then be transferred to income.
- Incurrence or payment of direct costs such as payment for transfer of title to the
corporation, shall be capitalized.

Journal Entry:
If without restrictions:
Property, Plant and Equipment XXX
Cash* XXX
Income from Donation XXX

If with restrictions:
Property, Plant and Equipment XXX
Cash* XXX
Unearned Income from Donation XXX

If restrictions are met:

Unearned Income from Donation XXX
Income from Donation XXX
*Credited for payment of costs and expenses related to the donated asset.

Self-Construction Direct Material XXX

Add: Direct Labor XXX
Add: Overhead Cost XXX
Initial Cost XXX

SUBSEQUENT MEASUREMENT
An entity must adopt either the cost model or the
revaluation model as the accounting policy for property,
plant, and equipment after initial recognition. The
accounting policy must be applied to an entire class of PPE
by the entity.
Cost Model
Property, plant, and equipment are carried at cost less any
accumulated depreciation and accumulated impairment
loss.
Depreciation
Depreciation is the systematic allocation of the asset’s
depreciable amount over its useful life.
Factors of Depreciation
1. Useful Life – the amount of time the entity expects to
use the asset.
It could also mean the number of hours it is expected
to work or the number of units it can generate or
manufacture.
The following are the factors that should be considered
in determining the useful life of an asset:
- Expected usage of the asset
- Expected physical wear and tear
- Technical obsolescence
- Legal limits for the use of the asset

Mike C. Buceta, CPA | Property, Plant and Equipment | 5

2. Residual Value – the amount expected to be recovered
by an entity after the asset’s useful life.
3. Depreciable Amount – amount subject to depreciation
(Acquisition Cost – Residual Value = Depreciable
Amount)
computed by dividing the depreciable amount by the
estimated useful life in terms of number of output or
units produced.
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
= 𝐴𝑐𝑡𝑢𝑎𝑙 𝑢𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 𝑥 𝐷𝑒𝑝′𝑛 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟

Recognition of Depreciation 𝐶𝑜𝑠𝑡 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒

𝐷𝑒𝑝′ 𝑛 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟 =
Depreciation is recognized as an expense unless it is 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒 (𝑖𝑛 𝑢𝑛𝑖𝑡𝑠)
included in the cost of producing another asset.
7. Composite or Group Method – when the company has
Depreciation starts when the asset is available for use and many assets, calculating asset depreciation one by one
stops when the asset is: becomes complex.
- Derecognized
- Classified as held for sale Composite Method – wherein dissimilar in nature items
- Fully depreciated are depreciated as if they were single unit.

Depreciation Methods Group Method – where in similar in nature items are

1. Straight-Line Method depreciated as if they were a single unit.

𝐶𝑜𝑠𝑡 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝐴𝑚𝑜𝑢𝑛𝑡

𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 𝐶𝑜𝑚𝑝𝑜𝑠𝑖𝑡𝑒 𝐿𝑖𝑓𝑒 =
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛

𝑇𝑜𝑡𝑎𝑙 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛

2. Sum-of-Years’ Digits (SYD) Method 𝐶𝑜𝑚𝑝𝑜𝑠𝑖𝑡𝑒 𝑅𝑎𝑡𝑒 =
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒 𝑎𝑠 𝑜𝑓 𝑡ℎ𝑒 8. Inventory Method
𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝐴𝑚𝑜𝑢𝑛𝑡 𝑥 PPE, ending XXX
𝑆𝑢𝑚 𝑜𝑓 𝑡ℎ𝑒 𝑌𝑒𝑎𝑟𝑠 ′ 𝐷𝑖𝑔𝑖𝑡 (𝑆𝑌𝐷)
Less: PPE, beginning XXX
𝑛 (𝑛 + 1) Depreciation Expense – Current Year XXX
𝑆𝑌𝐷 =
2
9. Retirement Method – no depreciation is recognized
Where n = useful life until the asset is retired.

3. Double-Declining Balance Method – also known as Original Cost of Retired PPE XXX
200% declining balance method. Less: Proceeds from retirement / disposal XXX
Depreciation Expense – Current Year* XXX
2
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐴𝑚𝑜𝑢𝑛𝑡, 𝑏𝑒𝑔 𝑥 *Applicable only when the asset is retired
𝑛

Where n = useful life 10. Replacement Method – no depreciation is recognized

until the asset is retired and replaced.
4. 150% Declining Balance Method
When the asset is retired and replaced
1.5 Replacement cost of PPE XXX
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐴𝑚𝑜𝑢𝑛𝑡, 𝑏𝑒𝑔 𝑥 Less: Proceeds from retirement / disposal XXX
𝑛
Depreciation Expense – Current Year XXX
Where n = useful life
When the asset is retired and not replaced
5. Working Hours Method – the number of hours Original Cost of Retired PPE XXX
consumed in using the asses will be the basis for its Less: Proceeds from retirement / disposal XXX
depreciation. Depreciation Expense – Current Year XXX

𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 Manner of Depreciating Leasehold Improvements

= 𝐴𝑐𝑡𝑢𝑎𝑙 ℎ𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑 𝑥 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟
Leasehold improvements are changes made by tenant to a
𝐷𝑒𝑝′ 𝑛 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟 property leased under an operating lease. They are
𝐶𝑜𝑠𝑡 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 depreciated over the useful life of the improvements or
=
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒 (𝑠𝑒𝑟𝑣𝑖𝑐𝑒 ℎ𝑜𝑢𝑟𝑠) remaining term of the lease, which is shorter.

6. Output Method – the number of units produced by

using the asset will be the basis for its depreciation. The
depreciation rate per hour shall be determined and it is

Mike C. Buceta, CPA | Property, Plant and Equipment | 6

Revaluation Model Cost Revaluation Adjust-
Property, plant, and equipment are carried at a revalued Model Model ment
carrying amount. Cost XX XX XX
1. If a revaluation increases the carrying amount of an Less: Accum. Dep’n (XX) (XX) XX
asset, the increase must be recognized as revaluation Carrying Value XX XX XX
surplus, which is classified as other comprehensive
income (OCI) item. Journal Entry:
- The increase, however, must be reported in profit or Property, Plant and Equipment XXX
loss if it offsets a revaluation decrease of the same Accumulated Depreciation XXX
asset that was previously recognized in profit or Revaluation Surplus XXX
loss.
2. Elimination Method – the accumulated depreciation is
2. A decrease in the carrying amount of an asset as a result eliminated against the gross carrying amount of the
of revaluation must be reflected in profit or loss. asset.
- The decrease, however, will be recorded in other
comprehensive income to the extend that there is a Journal Entry:
credit balance in the revaluation surplus for that Accumulated Depreciation XXX
asset. Property, Plant and Equipment
Revaluation Surplus XXX
3. When an item of PPE is derecognized or being
depreciated, the revaluation surplus included in OCI will Derecognition of PPE
be transferred to retained earnings. Derecognition refers to the removal from the accounts of
- If the PPE is derecognized, any remaining balance the cost of the property, plant, and equipment, as well as
in the revaluation surplus will be transferred to the corresponding accumulated depreciation.
retained earnings.
- If the PPE is being depreciated, the balance of the
When the carrying amount of an item of property, plant, and
revaluation surplus will be allocated and transferred
to retained earnings over the asset’s remaining equipment is no longer expected to generate future
useful life. economic benefit, it shall be derecognized.

Accounting Methods for Revaluation Gain or loss on disposal of PPE shall be included in profit or
1. Proportionate Method – also known as restatement loss.
method. The gross carrying amount is restated Net disposal proceeds XXX
proportionately to the change in the net carrying Less: Carrying amount of PPE (XXX)
amount. Gain (Loss) on disposal XXX (XXX)

---DO IT YOURSELF---

INITIAL RECOGNITION freight cost of transferring the equipment to ABC’s

premises, ₱4,000; costs of assembling and installing the
1. Which of the following standards addresses the
equipment, ₱8,000; costs of testing the equipment,
accounting for property, plant, and equipment?
₱6,000; administration and other general overhead
a. PAS 12
costs, ₱16,800; and advertisement and promotion costs
b. PAS 16
of the new product to be produced by the equipment,
c. PAS 26
₱15,200. The samples generated from testing the
d. PFRS 5
equipment were sold at ₱2,000. How much is the initial
cost of the equipment?
2. Which of the following is least likely capitalized as cost
a. 576,000
of land?
b. 578,000
a. Grading, filling, draining clearing and similar site
c. 592,800
development activities
d. 594,800
b. Survey
c. Landscaping and similar improvements that have
4. On January 1, 2021, XYZ Co. purchased fixtures at an
limited useful lives.
installment price of ₱520,000. XYZ paid ₱40,000 cash
d. Special assessment
down payment and issued a three-year noninterest
bearing note of ₱480,000 payable in three equal annual
3. ABC Co. acquired a piece of factory equipment overseas
installments starting December 31, 2021 for the
on cash basis for ₱400,000. Additional costs incurred
balance. The prevailing rate for the note as of January 1,
include the following: commission paid to broker for the
2021 is 12%. How much is the initial cost of the fixtures?
purchase of the equipment, ₱20,000; import duties of
a. 360,000
₱100,000; non-refundable purchase taxes of ₱40,000;

Mike C. Buceta, CPA | Property, Plant and Equipment | 7

 b. 424,293 Land New Building
c. 480,000 a. 16,864,000 33,780,000
d. 520,000 b. 16,104,000 34,180,000
c. 15,980,000 36,670,000
5. On April 1, 2021, Ana Co. purchased land and building d. 16,014,000 34,810,000
by paying ₱40,000,000 and assuming a mortgage of
₱8,000,000. The land and building have appraised 7. Jaja Co. purchased a lot for ₱8,000,000. Immediately
values of ₱20,000,000 and ₱40,000,000, respectively. after the purchase, Jaja Co. started the construction of a
The building will be used by Ana Co. as its new office. new building on the lot. Additional information follows:

Additional costs relating to the purchase include the Legal cost of conveying title to land 40,000
following: Special assessment 20,000
Survey costs 60,000
Legal cost of conveying and registering ₱ 32,000 Materials, labor, and overhead costs 22,000,000
title to land Cash discounts on materials purchased 120,000
Payment to tenants to vacate premises 36,000 not taken
Option paid on the land and building 24,000 Clerical and other costs related to 56,000
Option paid on similar land and building 12,000 construction
not acquired Excavation costs 400,000
Broker's fee on the land and building 60,000 Architectural fees and building permit 240,000
Unpaid real estate taxes prior to April 1, 120,000 Supervision by management on 48,000
2021 assumed by Ana Co. – assessed on construction
land Insurance premiums paid for workers 520,000
Real estate taxes after April 1, 2021 80,000 Payment for claim for injuries not 180,000
Repairs and renovation costs before the 160,000 covered by insurance
building is occupied Savings on construction 800,000
Repair costs after the building is 200,000 Cost of changes to plans and 560,000
occupied specifications due to inefficiencies
Paving of streets and sidewalks (not 40,000
How much are the respective costs of the land and the included in blueprint)
building? Income earned on a vacant space 36,000
rented as parking lot during
Land Building construction
a. 14,592,000 24,440,000
b. 15,492,000 32,640,000 How much are the capitalized costs of the land and the
c. 16,192,000 32,240,000 building?
d. 17,292,000 23,420,000
Land Building
6. Old Room Co. purchased land and building for a lump- a. 8,160,000 23,096,000
sum price of ₱48,000,000. The existing building will be b. 8,100,000 23,184,000
demolished, and a new building will be constructed. Old c. 8,100,000 23,144,000
Room incurred the following additional costs: d. 8,060,000 23,264,000

Title guarantee 80,000

8. Liz Co. exchanged equipment with Lix, Inc. Pertinent
Option paid for the land and old 24,000
data are shown below:
building acquired
Payments to tenants to vacate premises 48,000
LIZ Co. LIX, Inc.
Cost of razing the old building 240,000
Equipment 4,000,000 8,000,000
Construction cost of new building 34,000,000
Accumulated depreciation 800,000 3,200,000
(completed)
Carrying amount 3,200,000 4,800,000
Fair value 3,800,000 4,400,000
• The land and old building have fair values of
Cash paid by Liz to Lix 600,000 600,000
₱20,000,000 and ₱40,000,000, respectively.
• Some salvaged wood planks from the demolition
In Lix’s books, what amounts are recognized for the
were used as wall panels in the new building. Old
Room estimates that the salvaged wood planks following?
have a fair value of ₱120,000. The other salvaged
materials were sold for ₱60,000. Equipment Gain (Loss)
a. 3,400,000 400,000
How much are the allocated costs of the land and the b. 3,800,000 (400,000)
new building? c. 4,400,000 (1,000,000)
d. 5,000,000 0

Mike C. Buceta, CPA | Property, Plant and Equipment | 8

9. Lingkod Co. traded-in an old machine for a new model. 15. The most commonly used depreciation method is the
Pertinent data are as follows: a. straight-line method.
b. depreciation method based on revenue.
Old equipment: c. replacement method.
Cost 200,000 d. inventory method.
Accumulated depreciation 80,000
Average published retail value 24,000 16. Assume that a drill press is rebuilt during its sixth year
of use so that its useful life is extended 5 years beyond
New equipment: the original estimate of 10 years. If the asset recognition
List price 380,000 criteria are met, the cost of rebuilding the drill press
Cash price without trade in 280,000 should be charged to the appropriate:
Cash price with trade in 280,000 a. expense account
b. accumulated depreciation account
How much is the gain (loss) recognized by Lingkod Co. c. asset account
on the transaction? d. liability account
a. 60,000
b. 160,000 17. The carrying amount of an item of property, plant and
c. (60,000) equipment that is subsequently accounted for under
d. 0 the cost model is equal to
a. the historical cost less any accumulated
10. Nail Bite Co. acquired land with fair value of ₱4,000,000 depreciation.
in exchange for Nail Bite’s 10,000 shares with par value b. the fair value less any accumulated depreciation.
of ₱40 per share and quoted price of ₱360 per share. c. the historical cost less any accumulated
How much gain (loss) should Nail Bite Co. recognize on depreciation and any accumulated impairment loss.
the exchange? d. the fair value less any accumulated depreciation
a. 3,200,000 and any accumulated impairment loss.
b. 400,000
c. (400,000) 18. On January 1, 2021, Alain Co. acquired a piece of
d. 0 equipment with an estimated useful life of 4 years and
a residual value of ₱80,000 for a total purchase cost of
₱400,000. At normal capacity, the equipment’s
SUBSEQUENT MEASUREMENT
estimated service life is 40,000 hours or a total
11. Subsequent to initial recognition, an entity shall use this productive capacity of 160,000 units of a product. In
model to account for its items of property, plant and 2021 and 2022, the actual manufacturing hours were
equipment. 16,000 and 8,000, respectively, and the actual units
a. cost model produced were 60,000 and 30,000, respectively. How
b. fair value model much is the accumulated depreciation on December 31,
c. revaluation model 2022 under each of the following depreciation
d. a or c as an accounting policy choice methods?

12. It is the systematic allocation of the depreciable amount A B C D

of an asset over its estimated useful life.
SLM 100,000 160,000 80,000 160,000
a. Depreciation
SYD 160,000 224,000 128,455 224,000
b. Revaluation
c. Impairment DDB 200,000 300,000 200,000 300,000
d. all of these UOPM (I) 129,000 192,000 128,000 180,000
UOPM (O) 120,000 180,000 120,000 192,000
13. Which of the following is considered when depreciating
an asset under the cost model? *SLM = straight line method; SYD = sum-of-the-years’
a. The cost of the asset. digits; DDB = double declining balance; UOPM = units-
b. The useful life of the asset.
of-production method
c. The change in the fair value of the asset.
d. Both a and b.
19. Ted Co. acquired a machine on October 5, 2021 for a
14. Which of the following depreciation methods will most total cost of ₱160,000. The machine was estimated to
likely result in the highest amount of reported profit in have a useful life of 4 years and a salvage value of
the early years of an asset’s useful life? ₱10,000. Ted Co. uses the sum-of-the-years’ digits
a. Straight line method and prorates full-year depreciation to the
b. Double declining balance nearest month. Ted Co. sold the machine on December
c. 150% declining balance 27, 2022 for ₱40,000. How much is the gain (loss) on the
d. Sum-of-the-years’ digits sale?
a. (48,750)

Mike C. Buceta, CPA | Property, Plant and Equipment | 9

 b. 48,750 c. 2,977,667
c. (32,250) d. 333,333
d. 32,250
23. On January 1, 2021, Mon Co. signed a ten-year lease for
20. On January 1, 2021, Abyong Co. purchased the office space. Mon has the option to renew the lease for
following assets and decided to depreciate them as a an additional five-year period on or before January 1,
single unit: 2x10. During the first half of January 2022, Mon Co.
incurred the following costs:
Residual Useful • ₱3,600,000 for general improvements, with an
Cost estimated useful life of ten years, on the leased
Value Life
Machine Tools 80,000 4,000 3 years premises.
Meters 64,000 2,000 5 years • ₱400,000 for office furniture with an estimated
Returnable 120,000 - 6 years useful life of ten years.
containers • ₱800,000 for movable assembly line equipment
with a useful life of 5 years.
What is the composite life?
At the time the leasehold improvements were finished,
a. 5.40
b. 5 Mon Co. was uncertain as to the exercise of the lease
c. 4.70 renewal option. How much is the depreciation expense
d. 4.50 on the leasehold improvements in 2022?
a. 400,000
21. The small tools account of Manila Co. has a balance of b. 360,000
₱600,000 as of January 1, 2021. The movements in this c. 533,333
account during the year were as follows: d. 488,889

Feb. April Sept. Nov. 24. On January 1, 2021, Makati Co. acquired a machine for
Cost of new tools a total cost of ₱80,000,000. The machine was
40,000 - 120,000 88,000 depreciated using the sum-of-the-years’ digits method
acquired
Cost of old tools over a period of 10 years. On January 1, 2024, Makati
24,000 48,000 - 72,000 Co. changed its depreciation method to the double
retired
Disposal proceeds declining balance method. How much is the
2,000 3,200 - 4,000 depreciation expense in 2024?
of old tools
a. 40,727,272
How much is the depreciation expense in 2021 under b. 11,635,782
c. 12,556,780
the retirement method?
d. 13,556,702
a. 134,800
b. 166,800
25. Ligaya Co. acquired an aircraft from Joy, Inc. on January
c. 144,000
1, 2021 for a total cost of ₱24,000,000. The aircraft was
d. 118,800
estimated to have a useful life of 10 years. Ligaya Co.
uses the straight-line method of depreciation. On
22. On January 1, 2021, Samuel Co. acquired a piece of
January 1, 2025, a major part of the aircraft was replaced
equipment for ₱4,000,000. The equipment will be used
for a total cost of ₱3,200,000. Ligaya Co. cannot
to reproduce gaming software that is expected to be
determine the cost of the replaced part. How much is
marketed for 3 years. The equipment is expected to be
the loss on replacement?
used in producing products over the next two years,
a. 1,920,000
after which the equipment will be disposed of at a
b. 1,280,000
negligible amount. The estimated revenues from the
c. 1,200,000
software are as follows:
d. 0

Year Estimated Revenues 26. On December 31, 2021, Yanyan Co. determined the
2021 120,000,000 following information for the purpose of revaluing its
2022 80,000,000 building:
2023 40,000,000
Total 240,000,000 Historical cost 80,000,000
Initial estimate of useful life 25
Actual life 10
The actual revenue earned in 2021 is ₱180,000,000. The
Replacement cost 140,000,000
depreciation expense in 2021 is most likely equal to Effective life 8
a. 3,000,000 Remaining economic life 17
b. 2,000,000 Income tax rate 30%

Mike C. Buceta, CPA | Property, Plant and Equipment | 10

 If Yanyan Co. uses the proportional method of an estimated useful life of 10 years and a residual value
recording, the entry to record the revaluation would of ₱80,000. It is the policy of Cheena Co. to provide for
include which of the following? full-year depreciation in the year of acquisition and
none in the year of disposal. On May 12, 2024, the
a. a debit to accumulated depreciation of
equipment was sold for ₱120,000. Disposal costs of
₱32,000,000.
₱8,000 were incurred. How much is the gain (loss) on
b. a credit to accumulated depreciation of
the sale?
₱12,800,000.
a. (184,000)
c. a credit to building of ₱15,200,000.
b. 184,000
d. a debit to deferred tax of ₱14,160,000.
c. 192,000
d. (192,000)
27. On December 31, 2021, the building of Russel Co. was
revalued. Information determined on revaluation date is
as follows:

Historical cost 72,000,000

Accumulated depreciation 16,000,000
Initial estimate of residual value 8,000,000
Actual life on revaluation date 10
Replacement cost 144,000,000
Effective life 12
Remaining economic life 20
Income tax rate 30%

The estimate of residual value remained unchanged.

How much are the (1) revaluation surplus, net of tax, on
December 31, 2021 and (2) revised annual depreciation
in periods subsequent to December 31, 2021?
a. 25,900,000; 4,650,000
b. 37,000,000; 895,000
c. 37,000,000; 4,650,000
d. 25,900,000; 4,250,000

28. On December 31, 2021, the building of Borong Co. with

a historical cost of ₱320,000,000, accumulated
depreciation of ₱160,000,000, and an estimated useful
life of 20 years was determined to have a fair value of
₱200,000,000. Borong Co. is subject to an income tax
rate of 30%. Under the elimination method, the entry to
record the revaluation includes
a. a debit to accumulated depreciation for
₱160,000,000.
b. a debit to accumulated depreciation for
₱40,000,000.
c. a debit to building for ₱120,000,000.
d. a credit to building for ₱160,000,000.

29. On December 31, 2021, the land of Chit Co. with an

original cost of ₱40,000,000 was revalued to a fair value
of ₱28,000,000. This was the first revaluation made on
the land since it was purchased 2 years ago. On
December 2024, the building was appraised at a fair
value of ₱48,000,000. How much is the gain on
impairment reversal in 2024?
a. 8,000,000
b. 20,000,000
c. 12,000,000
d. 0

30. Cheena Co. purchased a piece of equipment on August

14, 2021 for a total cost of ₱400,000. The equipment has

Mike C. Buceta, CPA | Property, Plant and Equipment | 11