Professional Documents
Culture Documents
Discussion File - Property, Plant and Equipment
Discussion File - Property, Plant and Equipment
rental to others
are
tangible
items
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property subject to
depreciation or
amortization
Noel A. Bergonia, CPA, MBA
Recognition
it is probable that
future economic
benefits associated
Property, plant and
with the item
equipment shall be
recognized as an
asset if, and only if: the cost of the item
can be measured
reliably.
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Initial Measurement
Purchase price, including import
duties and non-refundable purchase
taxes, after deducting trade discounts
and rebates.
COST
the initial estimate of the costs of Any costs directly attributable to bringing the
dismantling and removing the item and asset to the location and condition necessary for
it to be capable of operating in the manner
restoring the site on which it is located intended by management.
❖costs of testing whether the asset is functioning properly, after deducting the net
proceeds from selling any items produced while bringing the asset to that location and
condition (such as samples produced when testing equipment)
❖professional fees
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Buildings
Land
Land Improvements
commissions, legal fees, ✓Water system commissions
title ✓Legal fees and title
✓Sidewalks and
✓Surveying fees
driveways ✓Reconditioning costs,
✓Local government special alterations and
assessment taxes ✓Parking lots
✓Landscaping costs that improvement costs
✓Liens, mortgages or
encumbrances on the are not permanent ✓Building permit fees for
property assumed renovation or
✓Costs of clearing, grading, construction
filling or leveling ✓Architect’s fees
✓Permanent landscaping ✓Interest costs on
costs borrowing used in self-
constructed buildings
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Building 1,360,000
Land 340,000
Cash 1,700,000
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❖To properly reflect cost, companies account for assets purchased on a deferred
payment arrangement at:
➢ fair value of the asset, or
➢ the present value of the consideration exchanged between the contracting parties at the date
of the transaction.
❖ 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 IAS 23.
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❖Example 2: On January 2, 2020, the Lee Tae-hwan Inc. purchased an industrial equipment.
In payment, the company signed a noninterest-bearing note requiring P250,000 to be
paid on December 31, 2022 (two years later). If the company had borrowed cash to buy
the equipment, the bank would have required an interest rate of 10%. The equipment has
no available fair value at the date of purchase. The entry to record the transaction is
Equipment (P250,000 x 0.8264) 206,600
Discount on Notes Payable 43,400
Notes Payable 250,000
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We can determine the interest rate that is implicit in the agreement as follows:
P199,300 (present value) = P250,000 (face amount) × PV factor
P199,300 ÷ P250,000 = 0.7972
The PV factor of .7972 when check with the PV table for single payment at 2 years will give us
an implicit rate of interest 12%.
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Land 900,000
Ordinary share capital (5,000 x P100) 500,000
Ordinary share premium 400,000
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On the other hand, if the condition of constructing a hospital facility was met,
then the entry to record the income is:
Unearned income from government grants 3,300,000
Income from government grants 3,300,000
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Land 3,300,000
Income from government grants 3,300,000
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Bearer Plants
❖These are living plant that are
➢ used in the production or supply of agricultural produce
➢ expected to bear produce for more than one period
➢ has a remote likelihood of being sold as agricultural produce, except
for incidental scrap sales.
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❖If a transaction does not meet the criteria for commercial substance, then it
will be treated without commercial substance.
❖The asset is measured at the carrying amount of the asset given up.
❖Carrying value of the asset given up = Carrying value of the asset + Cash
paid – Cash received
❖There will no gain or loss to be recorded for transactions without
commercial substance.
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EXAMPLE
Cup Co. and Noodles Co. had an exchange of a. the exchange lacks commercial substance
productive assets. Cup exchanged a piece of
equipment for Noodle’s equipment. The Cup Co.
following information is available:
Equipment- new 360,000
Cup Co. Noodles Co. Accumulated depreciation 540,000
Cost of asset exchanged P900,000 P800,000
Equipment- old 900,000
Accumulated depreciation 540,000 320,000
Fair value of asset exchanged 400,000 350,000
Noodles Co.
Required:
Prepare the journal entries to record exchange
Equipment- new 480,000
in both books if: Accumulated depreciation 320,000
a. the exchange lacks commercial substance Equipment- old 800,000
b. the exchange has a commercial substance,
and Cup will receive P50,000 from Noodles.
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Required:
Noodles Co.
Prepare the journal entries to record exchange Equipment- new (P350,000 + P50,000) 400,000
in both books if: Accumulated depreciation 320,000
a. the exchange lacks commercial substance Loss on exchange 130,000
b. the exchange has a commercial substance, Equipment- old 800,000
and Cup will receive P50,000 from Noodles.
Cash 50,000
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Allocation of Overhead
❖Overhead is the costs incurred during the manufacturing process,
not including the costs of direct labor and direct materials.
❖Allocation of manufacturing overhead may be equivalent to
➢ its fair share, using the same basis of allocation for manufactured
inventory
➢ the incremental amount of indirect manufacturing overhead.
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Interest Capitalization
❖Borrowing costs are interest and other costs that an entity incurs in
connection with the borrowing of funds.
❖A qualifying asset is an asset that necessarily takes a substantial period
of time to get ready for its intended use or sale.
❖An entity shall capitalize borrowing costs that are directly attributable to
the acquisition, construction or production of a qualifying asset as part
of the cost of that asset.
❖There are two types of borrowings to finance the qualifying assets:
➢ specific borrowings
➢ general borrowings
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Interest Capitalization
❖An entity shall begin capitalizing borrowing costs as part of the cost of a qualifying
asset on the commencement date.
❖The commencement date for capitalization is the date when the entity first meets all
of the following conditions:
➢ it incurs expenditures for the asset
➢ it incurs borrowing costs
➢ it undertakes activities that are necessary to prepare the asset for its intended use
or sale
❖An entity shall suspend capitalization of borrowing costs during extended periods in
which it suspends active development of a qualifying asset.
❖An entity shall cease capitalizing borrowing costs when substantially all the activities
necessary to prepare the qualifying asset for its intended use or sale are complete.
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Interest Capitalization
Charge to Charge to
expense expense
Borrowed Completion
funds date
Capitalization
period
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Specific Borrowings
❖Entities borrows money specifically for the construction of the qualifying
asset.
❖To the extent that an entity borrows funds specifically for the purpose of
obtaining a qualifying asset, the entity shall determine the amount of borrowing
costs eligible for capitalization as the actual borrowing costs incurred on that
borrowing during the period less any investment income on the temporary
investment of those borrowings.
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General Borrowings
❖To the extent that an entity borrows funds generally and uses them for the
purpose of obtaining a qualifying asset, the entity shall determine the
amount of borrowing costs eligible for capitalization by applying a
capitalization rate to the expenditures on that asset.
❖The capitalization rate shall be the weighted average of the borrowing costs
applicable to all borrowings of the entity that are outstanding during the
period.
❖An entity shall exclude from this calculation borrowing costs applicable to
specific borrowings.
❖ The amount of borrowing costs that an entity capitalizes during a period
shall not exceed the actual amount of borrowing costs it incurred during
that period.
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Example: General
Borrowings
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Example:
Specific Borrowing
and General
Borrowing
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Example:
Specific Borrowing
and General
Borrowing Average interest cost of the general borrowing is
= P975,000 x 9.42%
= P91,845
building
building
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Example 1
Prior to the revision (2020 and 2021), the
depreciation expense is P40,000 per year
On January 1, 2020, the Myeong-dong [(P250,000-P50,000) ÷ 5] or P80,000 for the two
Manufacturing Company purchased a years.
machine for P250,000. At the time of
purchase, the company estimated that the Cost P250,000
useful life of the machine is five years and a Accumulated depreciation for 2020 and 2021
salvage value of P50,000. On January 1, 2022, (P40,000 x 2) ( 80,000)
the company revised its estimates on which Book value on January 1, 2022 P170,000
the useful life should have been eight years. Less: Salvage value 50,000
The company uses straight-line method to Revised depreciable base P120,000
Estimated remaining useful life (8 - 2) 6
depreciate all assets and the company uses
Revised depreciation expense per year P 20,000
calendar period.
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Example 3
Cost P250,000
Accumulated depreciation for 2020 and 2021
(P50,000 x 2) (100,000)
On January 1, 2020, the Busan Company Book value on January 1, 2022 P150,000
purchased a machine for P250,000. At the time Less: Salvage value 22,000
of purchase, the company estimated that the Revised depreciable base P128,000
useful life of the machine is four years and a
salvage value of P50,000. The company uses 3 (3 + 1)
SYD=
straight-line method to depreciate the machine. 2
On January 1, 2022, the company revised its = 6
estimates on which the remaining useful life will
be three years, the salvage value to P22,000 and Depreciation
the depreciation method be sum-of-the-year’s
Year Computation Expense
digit method. The company uses calendar
period. 2022 P128,000 x 3/6 P64,000
2023 P128,000 x 2/6 42,667
How much is the revised depreciation expense 2024 P128,000 x 1/6 21,333
for 2022?
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Example 4
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Example 5
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❖Subsequent recognition:
✓ After recognition, an entity shall apply either the cost model or the
revaluation model to the exploration and evaluation assets.
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Wasting Assets
❖These are assets that are from natural resources.
❖They are only replace by an act of nature.
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Depletion
❖It is a systematic allocation of depletion base of the natural
resource over the period the natural resource is extracted.
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Depletion
Purchase price XX
Exploration cost, to the extent capitalized XX
Development cost XX
Present value of restoration cost XX
Residual value (XX)
Total Depletable Cost XX
Noel A. Bergonia, CPA, MBA Source: Intermediate Accounting 2 (2019) by Robles and Empleo
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Depletion
If additional expenditures are incurred or estimates are revised, the
new depletion rate is calculated using:
Carrying value (including additional capitalizable cost) - residual value
Depletion rate per unit =
Remaining units at the beginning of the year
Noel A. Bergonia, CPA, MBA Source: Intermediate Accounting 2 (2019) by Robles and Empleo
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Example 1
In 2020, Cooky Mining Company purchased property with
natural resources for P12,400,000. The property was relatively
close to a large city and had an expected residual value of
2020: No depletion.
P1,800,000.
The following information relates to the use of the property:
▪ In 2020, Cooky spent P800,000 in development costs.
▪ In 2021 and 2023, P600,000 and P1,600,000, respectively, 2021:
were spent for additional developments on the mine. Purchase price 12,400,000
▪ The tonnage mined and estimated remaining tons for years
Development cost, 2020 800,000
2020-2024 are as follows:
Development cost, 2021 600,000
Estimated Tons
Year Tons Extracted Total cost 13,800,000
Remaining
2020 0 5,000,000 Residual value (1,800,000)
2021 1,500,000 3,500,000 Depletable cost 12,000,000
2022 1,800,000 2,000,000 Divided by: Est. Tons 1/1/2021 5,000,000
2023 1,700,000 900,000
Depletion per unit, 2021 2.40
2024 900,000 0
Multiply by: Units extracted 1,500,000
Compute the depletion for the years 2020 – 2024. Total depletion, 2021 3,600,000
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Example 1 2022:
Total Cost 13,800,000
Accumulated depletion, 1/1/2022 (3,600,000)
In 2020, Cooky Mining Company purchased property with Carrying value, 1/1/2022 10,200,000
natural resources for P12,400,000. The property was relatively
Residual value (1,800,000)
close to a large city and had an expected residual value of
P1,800,000. Revised depletable cost 8,400,000
The following information relates to the use of the property: Divided by: Est. Tons 1/1/2022 3,800,000
▪ In 2020, Cooky spent P800,000 in development costs. Depletion per unit, 2022 2.21
▪ In 2021 and 2023, P600,000 and P1,600,000, respectively, Multiply by: Units extracted 1,800,000
were spent for additional developments on the mine. Total depletion, 2022 3,978,000
▪ The tonnage mined and estimated remaining tons for years
2020-2024 are as follows: 2023:
Estimated Tons Total Cost (P13,800,000 + P1,600,000) 15,400,000
Year Tons Extracted
Remaining Accumulated depletion, 1/1/2023 (7,578,000)
2020 0 5,000,000 Carrying value, 1/1/2023 7,822,000
2021 1,500,000 3,500,000 Residual value (1,800,000)
2022 1,800,000 2,000,000 Revised depletable cost 6,022,000
2023 1,700,000 900,000 Divided by: Est. Tons 1/1/2023 2,600,000
2024 900,000 0 Depletion per unit, 2023 2.32
Compute the depletion for the years 2020 – 2024. Multiply by: Units extracted 1,700,000
Total depletion, 2023 3,944,000
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Example 1
In 2020, Cooky Mining Company purchased property with
natural resources for P12,400,000. The property was relatively
close to a large city and had an expected residual value of
P1,800,000.
The following information relates to the use of the property:
▪ In 2020, Cooky spent P800,000 in development costs.
▪ In 2021 and 2023, P600,000 and P1,600,000, respectively, 2024:
were spent for additional developments on the mine. Total cost 15,400,000
▪ The tonnage mined and estimated remaining tons for years
Accumulated depletion, 1/1/2024 (11,522,000)
2020-2024 are as follows:
Estimated Tons
Carrying value, 1/1/2024 3,878,000
Year Tons Extracted Residual value (1,800,000)
Remaining
2020 0 5,000,000 Revised depletable cost 2,078,000
2021 1,500,000 3,500,000
2022 1,800,000 2,000,000
2023 1,700,000 900,000
2024 900,000 0
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Example 2
Purchase price 24,600,000
PV of restoration
(2,000,000 x .56) 1,120,000
On October 1, 2020, Tata Company, a calendar-year
Total cost 25,720,000
company, purchased the right to a mine. The total purchase
price was P24,600,000. The restoration cost to be paid after Divided by: Est. Tons 3,600,000
the mining period will be P2,000,000. The discount rate of Depletion per unit 7.14
the restoration cost is 10%. Estimated reserve were 3,600,000
tons. The company expected to extract and sell 50,000 tons Estimated mining period (3,600,000 ÷ 50,000 = 72 months ÷ 12) = 6 years
per month.
Determine the depletion and depreciation for 2020 and 2021. 2021:
(use 2 decimal places for the PV factor)
Depletion= P7.14 x (50,000 x 12)
= P4,284,000
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Determine the depletion and depreciation for 2020 and 2021. 2021:
(use 2 decimal places for the PV factor) Depreciation expense
= P1.31 x (50,000 x 12)
= P786,000
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Example 3
Useful life= 15 years
Mining period (1,500,000 ÷ 125,000) = 12 years
Depreciable cost 9,750,000
Divided by: Est. recoverable outputs 1,500,000
Depreciation per unit 6.50
Chimmy Mining constructed a building costing P9,750,000
on a mine property. The building has an estimated useful life Year 1
of fifteen years with no residual value. After all resources were Depreciation per ton 6.50
removed, the building will be of no use and will be Tons extracted 125,000
demolished by the entity. The estimated recoverable output Depreciation expense 812,500
from the mine is 1,500,000 tons.
Cost 9,750,000
During the first two years, the company extracted 125,000 Less: Accumulated depreciation 812,500
tons per year. Changes in the surrounding environment
forced the entity to shutdown for the succeeding two years.
Carrying value, 12/31/Y1 8,937,500
Thus, there were no extraction during the third and fourth Year 2
year. In the fifth year, the company resume extractions and
produced 150,000 tons. With improvements in the Depreciation per ton 6.50
production process, the company will extract 200,000 tons Tons extracted 125,000
per year. Depreciation expense 812,500
Determine the depreciation expense from the first to fifth year. Cost 9,750,000
Less: Accumulated depreciation 1,625,000
Carrying value, 12/31/Y2 8,125,000
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Shutdown Periods
Example 3 Year 3
Carrying value, 1/1/Y3 8,125,000
Divided by: remaining useful life 13
Depreciation expense 625,000
Chimmy Mining constructed a building costing P9,750,000
Cost 9,750,000
on a mine property. The building has an estimated useful life
of fifteen years with no residual value. After all resources were Less: Accumulated depreciation 2,250,000
removed, the building will be of no use and will be Carrying value, 12/31/Y3 7,500,000
demolished by the entity. The estimated recoverable output Year 4
from the mine is 1,500,000 tons.
Depreciation expense = P625,000
During the first two years, the company extracted 125,000 Cost 9,750,000
tons per year. Changes in the surrounding environment Less: Accumulated depreciation 2,875,000
forced the entity to shutdown for the succeeding two years.
Carrying value, 12/31/Y4 6,875,000
Thus, there were no extraction during the third and fourth
year. In the fifth year, the company resume extractions and Resume Operations
produced 150,000 tons. With improvements in the
production process, the company will extract 200,000 tons Year 5
per year for the remaining years. Remaining est. tons = 200,000 x 8 years = 1,600,000 tons
Determine the depreciation expense from the first to fifth year. Revised depreciation rate = P6,875,000 ÷ 1,600,000
= P4.30 per ton
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Cost Model
▪ After recognition as an asset, an item of property, plant and
equipment shall be carried at its cost less any accumulated
depreciation and any accumulated impairment losses. (IAS 16 par.
30)
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Revaluation Model
▪ After recognition as an asset, an item of property, plant and
equipment whose fair value can be measured reliably shall be carried
at a revalued amount being its fair value at the date of the
revaluation less any subsequent accumulated depreciation and
subsequent accumulated impairment losses (IAS 16 par. 31).
▪ If an item of property, plant and equipment is revalued, the entire
class of property, plant and equipment to which that asset belongs
shall be revalued (IAS 16 par. 36).
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Example 1 Cost
Carrying value
3,000,000
Revalued amount
4,500,000
Increase
1,500,000
On December 31, 2018, Ice Cream Corp. has an only Accum. Dep. (1,200,000) (1,800,000) ( 600,000)
item of machine with cost of P3,000,000 and Carrying value 1,800,000 2,700,000 900,000
accumulated depreciation of P1,200,000 was revalued
December 31, 2018
to a market value of P2,700,000 and a remaining
Machine 1,500,000
useful life of six years. The company adopts the policy
of reporting this items of property, plant and Accumulated depreciation 600,000
equipment at revalued amount less subsequent Revaluation surplus 900,000
accumulated depreciation and subsequent
December 31, 2019
impairment losses.
Depreciation expense 450,000
The company restated its accumulated depreciation Accumulated depreciation 450,000
proportionately with the change in the gross carrying
2,700,000 ÷ 6 = 450,000
amount of the asset and transfer a portion of the
revaluation surplus as the asset is being used by the Revaluation surplus 150,000
entity. On January 1, 2021, a second revaluation Retained earnings 150,000
indicates that the equipment had a fair value of
900,000 ÷ 6 = 150,000
P1,500,000.
Prepare the journal entries from 2018 to 2021.
Noel A. Bergonia, CPA, MBA
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Example 1
December 31, 2019
Cost 4,500,000
Accum. Dep.
On December 31, 2018, Ice Cream Corp. has an only
(1,800,000 + 450,000) (2,250,000)
item of machine with cost of P3,000,000 and
CV, 12/31/2019 2,250,000
accumulated depreciation of P1,200,000 was revalued
to a market value of P2,700,000 and a remaining Revaluation surplus = P900,000 – P150,000 = P750,000
useful life of six years. The company adopts the policy December 31, 2020
of reporting this items of property, plant and
Depreciation expense 450,000
equipment at revalued amount less subsequent
Accumulated depreciation 450,000
accumulated depreciation and subsequent
impairment losses.
Revaluation surplus 150,000
Retained earnings 150,000
The company restated its accumulated depreciation
proportionately with the change in the gross carrying Cost 4,500,000
amount of the asset and transfer a portion of the Accum. Dep.
revaluation surplus as the asset is being used by the (2,250,000 + 450,000) (2,700,000)
entity. On January 1, 2021, a second revaluation CV, 12/31/2020 1,800,000
indicates that the equipment had a fair value of
Revaluation surplus = P750,000 – P150,000 = P600,000
P1,500,000.
Prepare the journal entries from 2018 to 2021.
Noel A. Bergonia, CPA, MBA
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Example 1
January 1, 2021
Carrying value Revalued amount Decrease
Increase
Cost 4,500,000 3,750,000 750,000
On December 31, 2018, Ice Cream Corp. has an only
(2,700,000) (2,250,000) ( 450,000)
item of machine with cost of P3,000,000 and Accum. Dep.
accumulated depreciation of P1,200,000 was revalued Carrying value 1,800,000 1,500,000 300,000
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Example 2
On January 1, 2020, Salad Corp. purchased a factory January 1, 2020
equipment for P5,400,000 having an original useful
Factory equipment 5,400,000
life of 10 years. The equipment belongs to a class
Cash 5,400,000
carried by Salad using the revaluation model. Any
resulting revaluation surplus is transferred to retained December 31, 2020
earnings at the time of disposal. The corporation
Depreciation expense 540,000
records the proportionate relationship between the
Accumulated depreciation 540,000
asset account and accumulated depreciation.
5,400,000 ÷ 10 = 540,000
The results of the revaluation is as follows: CV 12/31/2020 = P5,400,000 – P540,000 = P4,680,000
Date of Revaluation Revalued amount
December 31, 2021
December 31, 2021 P4,680,000
Depreciation expense 540,000
Accumulated depreciation 540,000
Prepare the entries to record from January 1, 2020 to CV 12/31/2021 = P5,400,000 – P1,080,000 = P4,320,000
December 31, 2023.
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Prepare the entries to record from January 1, 2020 to Depreciation expense 585,000
December 31, 2023. Accumulated depreciation 585,000
CV 12/31/2023 = P5,850,000 – P2,340,000 = P3,510,000
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Example 3
On December 31, 2020, Mango Graham Corp. has an
December 31, 2020
only item of machine with cost of P3,000,000 and
accumulated depreciation of P1,200,000 was revalued Accumulated depreciation 1,200,000
to a market value of P2,700,000 and a remaining Machine 300,000
useful life of six years. The company adopts the policy Revaluation surplus 900,000
of reporting this items of property, plant and
equipment at revalued amount less subsequent December 31, 2021
accumulated depreciation and subsequent
Depreciation expense 450,000
impairment losses. The accumulated depreciation is
Accumulated depreciation 450,000
eliminated against the gross carrying amount of the
asset. The surplus is transferred to retained earnings 2,700,000 ÷ 6 = 450,000
as the asset is being used by the entity. Revaluation surplus 150,000
Retained earnings 150,000
On December 31, 2022, the company revalued the
900,000 ÷ 6 = 150,000
asset to P1,600,000.
CV 12/31/2021 = P2,700,000 – P450,000 = P2,250,000
Prepare the entry to record on December 31, 2020 to Revaluation surplus 12/31/2021
2022. = P900,000 – P150,000 = P750,000
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On December 31, 2020, Mango Graham Corp. has an Depreciation expense 450,000
only item of machine with cost of P3,000,000 and Accumulated depreciation 450,000
accumulated depreciation of P1,200,000 was revalued
Revaluation surplus 150,000
to a market value of P2,700,000 and a remaining
Retained earnings 150,000
useful life of six years. The company adopts the policy
of reporting this items of property, plant and Decrease
Carrying value Revalued amount Increase
equipment at revalued amount less subsequent 2,700,000 1,600,000 1,100,000
Cost
accumulated depreciation and subsequent
Accum. Dep. ( 900,000) ( 900,000)
impairment losses. The accumulated depreciation is
Carrying value 1,800,000 1,600,000 200,000
eliminated against the gross carrying amount of the
asset. The surplus is transferred to retained earnings
Accumulated depreciation 900,000
as the asset is being used by the entity.
Revaluation surplus 200,000
Machine 1,100,000
On December 31, 2022, the company revalued the
asset to P1,600,000.
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Objectives of IAS 36
▪ The objective of this Standard is to prescribe the procedures that an
entity applies to ensure that its assets are carried at no more than
their recoverable amount.
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Value in Use
The following elements shall be reflected in the calculation of an asset’s
value in use:
▪an estimate of the future cash flows the entity expects to derive from
the asset
▪expectations about possible variations in the amount or timing of
those future cash flows
▪the time value of money, represented by the current market risk-free
rate of interest
▪the price for bearing the uncertainty inherent in the asset
▪other factors, such as illiquidity, that market participants would
reflect in pricing the future cash flows the entity expects to derive
from the asset.
Noel A. Bergonia, CPA, MBA
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Value in Use
▪ Estimating the value in use of an asset involves the following steps:
➢ estimating the future cash inflows and outflows to be derived from
continuing use of the asset and from its ultimate disposal; and
➢ applying the appropriate discount rate to those future cash flows.
▪ The discount rate (rates) shall be a pre-tax rate (rates) that reflect(s)
current market assessments of:
➢ the time value of money; and
➢ the risks specific to the asset for which the future cash flow
estimates have not been adjusted.
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Value in Use
▪ Estimates of future cash flows shall include:
➢ projections of cash inflows from the continuing use of the asset;
➢ projections of cash outflows that are necessarily incurred to
generate the cash inflows from continuing use of the asset
(including cash outflows to prepare the asset for use) and can be
directly attributed, or allocated on a reasonable and consistent
basis, to the asset; and
➢ net cash flows, if any, to be received (or paid) for the disposal of
the asset at the end of its useful life.
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Example 2
January 2020
Equipment 1,000,000
Cash 1,000,000
In January 2020, Chimmy Corp. purchased an
equipment costing P1,000,000. The equipment has
December 31, 2020
an estimated residual value of P100,000 and an
estimated useful life of eight years. The asset is Depreciation expense 112,500
depreciated using straight-line basis. On December Accumulated depreciation 112,500
31, 2022, it became apparent that the equipment
suffered permanent impairment in value. It was (1,000,000 – 100,000) ÷ 8 = 112,500
determined that the equipment’s recoverable value CV 12/31/2020 = 1,000,000 – 112,500 = 887,500
was P400,000 with a remaining life of two years and a
residual value of P40,000. December 31, 2021
Prepare the journal entries from 2020 to 2023. Depreciation expense 112,500
Accumulated depreciation 112,500
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Example 2
December 31, 2022
Prepare the journal entries from 2020 to 2023. Depreciation expense 180,000
Accumulated depreciation 180,000
(P400,000 – P40,000) ÷ 2 = P180,000
123
Prepare the entry to record until December 31, 2022. Impairment loss 96,000
Accumulated depreciation 96,000
CV 12/31/2021 (600,000 – 120,000) P480,000
Recoverable amount 384,000
Impairment loss P 96,000
Noel A. Bergonia, CPA, MBA
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Example 3
December 31, 2022
Depreciation expense 48,000
Accumulated depreciation 48,000
On January 1, 2020, Tata Company acquired a
factory machine at a cost of P600,000. The 384,000 ÷ 8 =48,000
machine is being depreciated using the straight-
Machine 192,857
line method over its projected useful life of 10
years. On December 31, 2021, a determination Accumulated depreciation 84,857
was made that the asset’s recoverable amount was Recovery of impairment 84,000
P384,000. On December 31, 2022, the Revaluation surplus 24,000
recoverable amount was determined to be CV 12/31/2022 (384,000 – 48,000) P336,000
444,000 and management believes that the Recoverable amount 444,000
impairment loss previously recognized should be Increase P108,000
Limit on recovery
reversed. Previous impairment P96,000
Impairment already recovered
Prepare the entry to record until December 31, (60,000 – 48,000) (12,000)
Limit for recovery 84,000
2022. Revaluation surplus P24,000
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Example 4
December 31, 2020
Depreciation expense 187,500
Accumulated depreciation 187,500
Koya Inc. purchased a delivery truck on January 1,
2019 at a cost of P1,500,000. It is being P1,687,500 ÷ 9 = P187,500
depreciated using straight-line method over its Revaluation surplus 37,500
projected useful life of 10 years. On December 31,
2019, the asset’s fair value was P1,687,500. Retained earnings 37,500
Accordingly, an entry was made on that date to P337,500 ÷ 9 = P37,500
recognize the revaluation surplus. It is the
CV 12/31/2020 = P1,875,000 – P375,000 = P1,500,000
company’s policy to transfer a portion of
revaluation surplus to retained earnings every Revaluation surplus 12/31/2020
period. = P337,500 – P37,500 = P300,000
December 31, 2021
An impairment was detected on December 31, Depreciation expense 187,500
2021 and the recoverable amount of the asset was
determined to be P1,010,625. On December 31, Accumulated depreciation 187,500
2022, the fair value of the asset was determined to Revaluation surplus 37,500
be P1,095,000.
Retained earnings 37,500
Prepare the entries from 2019 to 2022. CV 12/31/2021 = P1,875,000 – P562,500 = P1,312,500
Revaluation surplus 12/31/2021
Noel A. Bergonia, CPA, MBA = P337,500 – P75,000 = P262,500
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Example 4
December 31, 2021
Accumulated depreciation 129,375
Revaluation surplus 262,500
Koya Inc. purchased a delivery truck on January 1,
2019 at a cost of P1,500,000. It is being Impairment loss 39,375
depreciated using straight-line method over its Delivery Truck 431,250
projected useful life of 10 years. On December 31, CV 12/31/2021 P1,312,500
2019, the asset’s fair value was P1,687,500. Recoverable amount 1,010,625
Accordingly, an entry was made on that date to Decrease P 301,875
recognize the revaluation surplus. It is the Remaining balance of reval. surplus 262,500
company’s policy to transfer a portion of Impairment loss P 39,375
revaluation surplus to retained earnings every Carrying value Revalued amount Decrease
Increase
period. 1,443,750 431,250
Cost 1,875,000
Accum. Dep. (562,500) (433,125) ( 129,375)
An impairment was detected on December 31,
2021 and the recoverable amount of the asset was Carrying value 1,312,500 1,010,625 301,875
determined to be P1,010,625. On December 31, December 31, 2022
2022, the fair value of the asset was determined to
be P1,095,000. Depreciation expense 144,375
Accumulated depreciation 144,375
Prepare the entries from 2019 to 2022. 1,010,625 ÷ 7 = 144,375
CV 12/31/2022 = P1,443,750 – P577,500 = P866,250
Noel A. Bergonia, CPA, MBA
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Example 4
December 31, 2022
Delivery Truck 381,250
Accumulated depreciation 152,500
Koya Inc. purchased a delivery truck on January 1,
2019 at a cost of P1,500,000. It is being Recovery of impairment 33,750
depreciated using straight-line method over its Revaluation surplus 195,000
projected useful life of 10 years. On December 31, CV 12/31/2022 P 866,250
2019, the asset’s fair value was P1,687,500. Recoverable amount 1,095,000
Accordingly, an entry was made on that date to Increase P 228,750
recognize the revaluation surplus. It is the Limit for impairment reversal
Previous impairment P39,375
company’s policy to transfer a portion of Recovered
revaluation surplus to retained earnings every (150,000 - 144,375) 5,625
period. Limit for impairment reversal (33,750)
Revaluation surplus P 195,000
An impairment was detected on December 31, Carrying value Revalued amount Increase
2021 and the recoverable amount of the asset was Cost 1,443,750 1,825,000 381,250
determined to be P1,010,625. On December 31, Accum. Dep. (577,500) (730,000) ( 152,500)
2022, the fair value of the asset was determined to 228,750
Carrying value 866,250 1,095,000
be P1,095,000.
Shortcut for the revaluation surplus
CV w/o impairment
Prepare the entries from 2019 to 2022.
(1,500,000 -[150,000 x 4]) 900,000
Recoverable amount 1,095,000
Noel A. Bergonia, CPA, MBA Revaluation surplus 195,000
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Derecognition
▪ The carrying amount of an item of property, plant and equipment
shall be derecognized:
❖on disposal; or
❖when no future economic benefits are expected from its use or
disposal. (IAS 16 par. 67)
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Derecognition
▪ Mode of derecognition:
➢ Sale
➢ Exchange
➢ Involuntary conversion
➢ Abandonment
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Example 1
As of December 31, 2020, the Selling price 55,000
equipment of Porkchop Inc., originally Carrying value, 1/1/21
(100,000 - 60,000) (40,000)
purchased on January 1, 2016, has a
Gain on sale 15,000
cost of P100,000 and accumulated
depreciation of P60,000. It is the
company’s policy to depreciate assets Cash 55,000
using straight-line method. Accumulated depreciation 60,000
Equipment 100,000
Gain on sale of equipment 15,000
On January 1, 2021, the company sold
it at P55,000.
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Example 2
Selling price 55,000
As of December 31, 2020, the Carrying value, 5/1/21
5/31/21
equipment of Menudo Inc., originally (100,000 - 65,000*) (35,000)
purchased on January 1, 2016, has a Gain on sale 20,000
cost of P100,000 and accumulated
depreciation of P60,000. It is the *60,000 ÷ 5 = P12,000 x 5/12 = P5,000
60,000 + 5,000 = 65,000
company’s policy to depreciate assets
using straight-line method.
Cash 55,000
Accumulated depreciation 60,000
On May 31, 2021, the company sold it Depreciation expense 5,000
at P55,000. Equipment 100,000
Gain on sale of equipment 20,000
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Involuntary Conversion
▪ An involuntary conversion occurs when your property is destroyed,
stolen, condemned, or disposed of under the threat of condemnation
and you receive other property or money in payment, such as
insurance or a condemnation award.
▪ Gain or loss arises from the difference of the amount received and the
carrying value of the property
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Example 3
Steak Co. has a delivery truck which
has an original cost of P250,000. This
truck is insured in Pork Insurance
Company. Tragically on February 1,
Cash 155,000
2021 when its carrying value is
Accumulated depreciation 100,000
P150,000, it was totaled in an
Delivery truck 250,000
accident. After the evaluation, the
Gain on disposal 5,000
insurance company paid Steak Co.
P155,000.
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Abandonment
▪ If the asset has no use already or when it is fully utilized, the company
may abandon it.
▪ If the asset has still a carrying value at the time of abandonment, it will
be charged to loss.
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Example 4
ago is P150,000.
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Example 5
On January 1, 2021, Shanghai Inc.
decided to abandon its faulty factory
equipment with P20,000 carrying
value on its accounting record. The Accumulated depreciation 130,000
original cost of this equipment Loss on disposal 20,000
purchased 8 years ago is P150,000. Factory Equipment 150,000
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