PROPERTY, PLANT AND EQUIPMENT (MILLAN) EXAMPLES OF NOT PPE:

 LAND  Held for speculation

4 OBJECTIVES  Held for undetermined future
P Prescribes the accounting and disclosures use
necessary to:
1. Provide users information about an entity’s  LAND/BUILDING  Rented out under
investment in PPE operating lease
2. Changes in PPE  For sale in the
ordinary course of
P Principal issues: business
1. Recognition
 Held for sale under
2. Carrying amount
PFRS 5
3. Depreciation charges
4. Impairment losses
------------------------------------------------------------------------------  BIOLOGICAL ASSETS related to agricultural
4 SCOPE activity
 PAS 16 (Accounting for PPE) is NOT applied to:  INTAGIBLE ASSETS
a. PFRS 5 (Noncurrent Assets Held for Sale and  MINOR Spare parts and SHORT-LIVED Stand-
Discontinued Operations) – PPE classified as by equipment
held for sale
b. Biological assets related to AGRICULTURAL ------------------------------------------------------------------------------
ACTIVITY except: BEARER PLANTS (PAS 16 4 RECOGNITION
applies to bearer plants but NOT to the Cost of a PPE shall be recognized as an asset if:
produce on bearer plants) 1. PROBABLE that future economic benefits
c. PFRS 6 (Exploration for and Evaluation of associated with the item will flow
Mineral Resources) 2. Cost of the item can be MEASURED RELIABLY
d. Mineral rights and mineral reserves (Ex: Oil, ------------------------------------------------------------------------------
natural gas and similar non-regenerative 4 SPARE PARTS AND SERVICING EQUIPMENT
resources) P Spare Parts
 Recognized as PPE
P Stand-by Equipment
when they meet the
 PAS 16: Applies to PPE used to DEVELOP or P Servicing Equipment
definition of PPE
MAINTAIN the assets in (b) – (d)
EX: MAJOR Spare
------------------------------------------------------------------------------
parts and equipment
4 CHARACTERISTICS
used for more than
1. TANGIBLE ASSETS one year
- Has physical substance  OTHERWISE:
2. USED IN NORMAL OPERATIONS Inventory
- Production, supply, rental or administrative
purpose ------------------------------------------------------------------------------
3. LONG-TERM IN NATURE 4 SAFETY AND ENVIRONEMENTAL EQUIPMENT
- Used in more than one year P Classified as PPE
P May be necessary to obtain the future economic
EXAMPLES OF PPE: benefits from its other assets
 Used in business P Noncompliance with government may negatively
 LAND impact the entity’s operation
 Held for future plant use ------------------------------------------------------------------------------
4 INITIAL MEASUREMENT
 BUILDING  Used in business
 EQUIPMENT  Used in the production of goods
 Held for environmental and The amount of cash or cash
safety reasons equivalents paid or the FV of the
 Rented out COST other consideration given to
acquire the asset at the time of
 MAJOR Spare parts and LONG-LIVED Stand by its acquisition or construction
equipment
 a. PURCHASE PRICE including:

(+) Import Duties 4 ILLUSTRATIONS

(+) Non-refundable purchase  ACQUISITION ON ACCOUNT
taxes
AFTER deducting:
(-) Trade discounts ABC acquired an equipment for P112,000
(-) Rebates on account with a credit term of 2/15, n/3.
Any discount is computed based on
purchase price. The purchase price is
b. COSTS DIRECTLY ATTRIBUTABLE inclusive of 12% VAT. ABC is a VAT-
registered and any input VAT paid is
P To bringing the asset to the refundable through deduction from
LOCATION and CONDITION, monthly output VAT remitted to the BIR.
ELEMENTS
OF COST NECESSARY for it to be
capable of operating in a REQUIREMENT: Compute initial cost of the
manner intended by equipment.
management

c. RESTORATION OR SOLUTION:
DECOMMISSIONING COSTS
Purchase price inclusive of VAT 112,000
The OBLIGATION P Initial estimate of the: Divide by 112%
of the entity incurs - Costs of dismantling Purchase price exclusive of VAT 100,000
for purposes - Removing the item Cash discount based on purchase price (2,240)
OTHER THAN to - Restoring the site on Cash Price Equivalent 97,760
produce which it is located
inventories 112,000 x 2% = 2,240
------------------------------------------------------------------------------
4 CESSATION/STOP OF CAPITALIZING COSTS TO PPE Journal Entries:
NET METHOD
Equipment 97,760
Input VAT 12,000
RECOGNITION WHEN: Accounts Payable 109,760
OF COST P the item is in the
CEASES/STOPS location and condition
VAT is deducted from the invoice price because it
necessary for it to be
is a refundable tax. Only non-refundable taxes
capable of operating
are included as cost of an item of PPE
THE FF COSTS ARE NOT
IF: ABC is not a VAT- registered payer, the VAT
INCLUDED IN THE CARRYING
paid is INCLUDED as cost of equipment
AMOUNT OF A PPE:
1. Costs incurred in using
or redeploying Scenario 1:
2. Costs incurred while an If payment made within discount period:
item capable of Accounts Payable 109,760
Cash in Bank 109,760
operating in a manner
intended by mgt has Scenario 2:
yet to be brought into If payment made beyond discount period:
use or is operating at Accounts Payable 109,760
Purchase discount lost 2,240
less than full capacity
Cash in Bank 112,000
3. Initial operating losses
4. Costs of relocating or
reorganizing part or all
of an entity’s operation
 4 ACQUISITION THROUGH EXCHANGE
GROSS PROFIT METHOD
Equipment 100,000 The cost of
12,000 PPE acquired a. The exchange lacks
Input VAT
112,000 through commercial substance
Accounts Payable
exchange is b. The Fair Value of
Scenario 1:
NOT NEITHER the asset
If payment made within discount period:
112,000 MEASURED received nor asset given
Accounts Payable
AT FAIR up is reliably measurable
Cash 109,760
Equipment 2,240 VALUE
Scenario 2:
If payment made beyond discount period: An exchange transaction has commercial substance
Accounts Payable 112,000 if:
Purchase Discount Lost 2,240
Cash 112,000 P The configuration (risk, timing and amount) of
Equipment 2,240 the cash flows of the asset received DIFFERS
from the configuration of the cash flows of the
 DEFERRED SETTLEMENT-NO CASH PRICE EQUIVALENT asset transferred
P The entity-specific value of the portion of the
entity’s operations affected by the
transactions changes as a result of the
ABC acquired a building for P950,000 including P5,000
exchange
non-refundable purchase taxes. The purchase
P The difference of the above is significant
agreement provided for payment to be made in full
on December 31, 20x1. Legal fees of P2,000 were relative to the fair value of the assets
incurred in acquiring the building and paid on January exchanged
1, 20x1. An appropriate discount rate is 10%
SIMPLY:
REQUIREMENT: Compute initial cost of the If the expected future cash flows from the asset
equipment. received significantly differ from that of the asset
given-EXCHANGE HAS COMMERCIAL SUBSTANCE
----------------------------------------------------------------------------
4 NON-MONETARY EXCHANGE
SOLUTION:
Purchase price including non-refundable taxes 950,000 WITH COMMERCIAL NO COMMERCIAL
Multiply: PV of 1 @ 10% 0.90909 SUBSTANCE SUBSTANCE
Cash price equivalent of building purchased 863,636 In order of priority: If exchange lacks
Legal fees 2,000 1. FV of the asset GIVEN commercial substance:
Initial cost of Building 865,636 UP
2. FV of the asset P Carrying Amount of
RECEIVED the asset GIVEN UP
3. Carrying amount of
asset GIVEN
4 COMBINATION OF MONETARY AND NON-MONETARY 4 ACQUISITION THROUGH ISSIUANCE OF BONDS
EXCHANGE PAYABLE

WITH COMMERCIAL NO COMMERCIAL

SUBSTANCE
In order of priority:
1. Payor:
Fair Value of the asset
GIVEN UP + Cash paid
Recipient:
Fair value of the asset
given – cash received
2. Fair value of the asset
received (without any
adjustment for any
cash paid or received)
3. Payor:
Carrying Amount of
asset GIVEN UP + Cash
paid
Recipient:
Carrying amount of the
asset GIVEN UP – Cash
received
------------------------------------------------------------------------------
4 ACQUISITION THROUGH TRADE-IN
SUBSTANCE In order of priority:
Payor: 1. Fair value of asset RECEIVED
Carrying amount of 2. Fair Value of Bonds Payable ISSUED
the asset GIVEN UP +
cash paid
The foregoing order of priority is in accordance
Recipient: with the provisions of PAS 16 and PFRS 9 (Financial
Carrying amount of Instruments)
the asset GIVEN UP – P PAS 16.23 provides that: “The cost of an item
Cash received of PPE is the cash price equivalent at the
recognition date.”
Cash price equivalent at recognition date = Fair
Value at recognition date
Therefore:
P PFRS 9 provides that: “The fair value of a
financial instrument at initial recognition is
normally the TRANSCTION PRICE”
When issuing bonds payable in exchange
for a PPE, the transaction price is the
cash price equivalent of the PPE
acquired, that is the amount that would
have been paid if the entity acquired the
PPPE on cash basis rather than by issuing
bonds payable.

P If: FV of the asset is indeterminable, the cost

CONCEPT:
of PPE is measured at the FV of the bonds
Trade-in transactions are usually made by an entity with a
payable issued, which can be determined using
seller-one who usually sells similar assets as the one being
PV of future cash flows discounted at
exchanged.
prevailing market rate of interest for a similar
instrument
MEASUREMENT OF COST:
In order of priority:
1. Fair Value of the asset given up + cash given
2. Fair value of asset received (cash price without
trade-in)

FORMAT:

Cash price without trade in 70,000

Cash price with trade in (55,000)
Trade-in value of old PPE (assumed FV of asset given up) 15,000
Cash paid 55,000
Cost of new PPE 70,000
INVESTMENT PROPERTY (MILLAN)
Examples of Investment NOT Investment Property
4 SCOPE Property
 PAS 40 – recognition, measurement, and disclosure P Land held for long-term r Property intended for sale
 PAS 40 does not apply to: capital appreciation rather in the ordinary course of
r Accounting for leases (except: lessee’s IP accounted as than for short-term sale in the business or in the
finance lease and lessor’s IP leased out under operating the ordinary course of the process of construction or
lease) business development for such sale
r Biological Assets – related to agricultural activity P Land held currently for (Inventory)
r Mineral rights and mineral reserves – like oil, natural undetermined future use r Property acquired
gas and similar non-regenerative resources P Building owned by the exclusively with a view to
entity (or held by the subsequent disposal in the
4 INVESTMENT PROPERTY VS. OWNER-OCCUPIED PROPERTY entity under a finance future or for development
INVESTMENT PROPERTY OWNER OCCUPIED lease) and leased out and resale
PROPERTY under one or more r Property being
P Held for use in the operating leases constructed or developed
P DEFINITION: production or supply of P Building that is vacant but on behalf of third parties
- property (land or building goods or services or for is held to be leased out (PAS 11: Construction
or part of a building or both) administrative purposes under one or more Contracts)
held (by the owner or by the P Generates cash flows in operating leases r Owner-occupied property
lessee under finance lease) conjunction/relation P Property that is being (PAS 16)
 To earn rentals with the other assets constructed or developed r Property occupied by
 Or for capital held by the entity for future use as IP employees (whether or
appreciation P May include assets P Building rented out under not the employees pay
other than land and rent at market rates)
operating lease
building r Owner occupied property
P ONLY LAND and P Building held under
P Accounted under PAS waiting for disposal
BUILDING can qualify as finance lease and rented
16 Property that is leased to
investment property out under operating lease
P Classified as another entity under a
r Equipment and finance lease
property, plant and
other physical r Building being constructed
equipment
assets cannot for a third party
qualify as IP

P To qualify as IP, land or

4 PROPERTY THAT IS PARTLY INVESTMENT PROPERTY AND
building must:
PARTLY OWNER OCCUPIED
1. First qualify the
definition of asset
2. It must not be
owner occupied, If the portions can P Account
inventory or asset be sold separately separately:
held for sale (leased out  Owner-occupied
P Held for rentals or for capital separately under  Investment
appreciation or both finance lease) property
P Generates cash flows largely
independently of the other
assets held by the entity If the portions P If insignificant
P Includes only LAND and cannot be sold portion is held for use
BUILDING separately (leased in the supply of good
P Accounted under PAS 40 out separately or services or admin
under finance lease) purposes:
 Investment
property
P If Significant
portion:
 Owner-
occupied or
PPE
4 ANCILLIARY SERVICES TO OCCUPANTS
4 INVESTMENT PROPERTY HELD UNDER A FINANCE LEASE

SIGNIFICANT OWNER-OCCUPIED PROPERTY FV of the

SERVICES Example: Services provided by property
hotels
INITIAL LOWER

PV of the
minimum
INVESTMENT PROPERTY
INSIGNIFICANT lease
Example: Owner of the office
SERVICES payments
building provides security and
maintenance services
4 SUBSEQUENT MEASUREMENT
4 INVESTMENT PROPERTY IN CONSOLIDATED FINANCIAL
P Choose either fair value model or cost model
STATEMENTS
P Must use fair value model if property interest in
When an entity owns property that is leased to and occupied by its operating lease is classified as investment property
parent or another subsidiary: P Apply accounting policy chosen consistently to all
items of investment property
P Use both cost model and fair value simultaneously
OWNER-OCCUPIED PROPERTY
Consolidated ONLY if:
From the perspective of the
FS  Fair Value of one property under fair value
group (Parent)
model cannot be determine reliably on
INITIAL RECOGNITION
 Separate choices are made for:
Individual FS INVESTMENT PROPERTY a. Investment properties backed by
liabilities that pay return linked directly
to investment properties
b. All other investment properties
4 RECOGNITION P Required to determine FAIR VALUES of all investment
properties regardless of accounting policy chosen
Investment property is recognized as an asset when and ONLY: P Use fair value for measurement and disclosure under
P It is probable that future economic benefits that are fair value model; use fair value for disclosure only
associated with the investment property will flow to the under cost model
entity P Encouraged, but not required, to use services of
P The cost of the investment can be measured reliably independent valuer to determine fair values of
investment property
P An entity that has chosen fair value model cannot
4 MEASUREMENT AT RECOGNITION subsequently change to cost model (FV -> COST)
P Can change policy from Cost model to Fair value model
(COST -> FV)
INITIAL P AT COST +

4 INABILITY TO DETERMINE FAIR VALUE RELIABLY ON

 COST OF PURCHASED INVESTMENT INITIAL RECOGNITION
PROPERTY:
 Purchase Price The following instances are when the entity can justify to use
 Directly Attributable Cost the cost model if fair value is unavailable
 Professional fees for legal
services 1. On first acquisition date
 Property transfer taxes 2. On reclassification of an existing property to investment
 Other transaction costs property
3. During construction of a property to be held as investment
 COST OF A SELF-CONSTRUCTED
INVESTMENT PROPERTY ( 1 ) And (2) - can use cost model until disposal of
 Cost at the date when construction investment property
or development is completed - when depreciating, the residual value shall
be assumed zero
r EXCLUDED: (3) – if the fair value is determinable after construction,
- Start-up Costs (unless necessary) use FV model
- Operating losses
- Abnormal amounts of wasted material,
labor or other resources
 Accordingly, the grant of P50,000,000 is allocated as income over 5
years depending on the method of depreciation. If the straight-line
method is used, the pertinent entries in the first year are:

GOVERNMENT GRANT

ILLUSTRATION 1: Grant in relation to expenses Cash 50,000,000

Deferred grant income 50,000,000
PAS 20 provides that “grant” in recognition of specific expenses Building 80,000,000
shall be recognized as income over the period of the related Cash 80,000,000
expense. Depreciation 16,000,000
Accumulated Depreciation 16,000,000
(80,000,000/5)
An entity received a grant of P15,000,000 from the national Deferred grant income 10,000,000
government for the purposes of defraying safety and environmental Grant income 10,000,000
expenses over the period of three years. (50,000,000/5)

The safety and environmental expenses will be incurred by the ILLUSTRATION 3: Non-depreciable asset
entity as follows:

First year 2,000,000 PAS 20 provides that “grant related to nondepreciable asset
Second year 3,000,000 requiring fulfillment of certain conditions shall be recognized
Third year 5,000,000 as income over the periods which bear the cost of meeting
the conditions.”

SOLUTION:
Accordingly, the grant of P15,000,000 is allocated as income over An entity is granted a large tract of land in Mindanao by the
three years in proportion to the costs incurred. national government. The fair value of the land is P60,000,000.
The grant requires that the entity shall construct a refinery on
FIRST YEAR the site. The cost of the refinery is estimated to be P100,000,000
Cash 15,000,000 and the useful life is 20 years.
Deferred grant income 15,000,000
Deferred grant income 3,000,000 SOLUTION:
Grant income 3,000,000 Accordingly, the grant of P60,000,000 is allocated over 20 years.
(2/10 x P15,000,000) Land 60,000,000
Environmental expenses. 2,000,000 Deferred grant income 60,000,000
Cash 2,000,000 Refinery 100,000,000
Cash 100,000,000
SECOND YEAR Depreciation 5,000,000
Deferred grant income 4,500,000 Accumulated Depreciation 5,000,000
Grant income 4,500,000 (100,000,000/20)
(3/10 x P15,000,000) Deferred grant income 3,000,000
Environmental expense 3,000,000 Grant income 3,000,000
Cash 3,000,000 (60,000,000/20)
Deferred grant income. 7,500,000
Grant income 7,500,000
(5/10 x P15,000,000) ILLUSTRATION 4: Receivable as compensation for expenses or
Environmental expenses. 5,000,000 losses already incurred
Cash. 5,000,000
PAS 20 provides that “a government grant that becomes
receivable as compensation for expenses or losses already
ILLUSTRATION 2: Depreciable Asset incurred or for the purpose of giving immediate financial
support to the entity with no further related costs shall be
PAS 20 provides that “grant related to depreciable asset shall be recognized as income of the period in which it becomes
recognized as income over the periods and in proportion to the receivable.”
depreciation of the related asset.”
An entity received grant of P50,000,000 from the USA
An entity received a grant of P50,000,000 from the Australian government to compensate for massive losses incurred
government for the acquisition of a chemical facility with an because of a recent earthquake.
estimated cost of P80,000,000 and useful life of 5 years.

SOLUTION:
SOLUTION: Accordingly, the grant of P50,000,000 is recognized as income
immediately as follows:

Cash 50,000,000
Grant income 50,000,000
ILLUSTRATION 5: Deferred income approach REPAYMENT OF GOVERNMENT GRANT

 Grant related to income

At the beginning of the current year, an entity purchased an
equipment for P5,000,000 and received a government grant of
P500,000 with respect to this asset.
The equipment is to be depreciated on a straight-line basis over 5
years. The estimated residual value of the equipment is 200,000
DEFERRED INCOME APPROACH
1. To record the acquisition of the equipment
On January 1, an entity received P6,000,000 as
government grant to compensate for costs to be
incurred in planting 100 trees every year in a
reforestation area over a period of 3 years.
On January 1, 2015, the entire amount of the
government grant became repayable because the
entity has never planted trees in 2014 which is a clear
noncompliance of the conditions attached to the grant.

Equipment 5,000,000 SOLUTION:

Cash 5,000,000
2014
Jan 1 Cash 6,000,000
2. To record the government grant as deferred income Deferred grant income. 6,000,000
Dec Deferred grant income 2,000,000
Cash 500,000 31 Grant income. 2,000,000
Deferred grant income 500,000 (6,000,000/3yrs)

2015
3. To record annual depreciation Jan Deferred grant income 4,000,000
1 Loss on repayment of grant 2,000,000
Depreciation 960,000
Cash. 6,000,000
Accumulated Depreciation 960,000
(5,000,000-200,000/5 years)
 Grant related to asset
4. To recognize the income from government grant for the
current year On January 1, 2014, an entity received P5,000,000 as
Deferred grant income 960,000 government grant related to a building that is
Grant income 960,000 purchased on same date at a cost of P25,000,000. The
(5,000,000-200,000/5 years) useful life of the building is 10 years with no residual
value.
DEDUCTION FROM ASSET APPROACH On January 1, 2016, the entire amount of the
government grant became repayable due to the lack of
1. To record the acquisition of the equipment compliance with the conditions attached to the
government grant.
Equipment 5,000,000
Cash 5,000,000
 Deferred income approach

2. To record the government grant as a deduction from the 2014

cost of the asset Jan 1 Building 25,000,000
Cash. 25,000,000
Cash 500,000 1 Cash 5,000,000
Equipment 500,000 Deferred grant income. 5,000,000
Dec Depreciation 2,500,000
31 Accumulated depreciation. 2,500,000
3. To record annual depreciation
(25M/10)
31 Deferred grant income. 500,000
Depreciation 860,000 Grant income. 500,000
Accumulated Depreciation 860,000 (5M/10)

Acquisition cost 5,000,000

Government grant (500,000)
Net cost 4,500,000
Residual value (200,000)
 2015
Dec Depreciation. 2,500,000
31 Accumulated Depreciation. 2,500,000
Deferred grant income. 500,000
Grant income. 500,000

2016
Jan 1 Deferred grant income 4,000,000 GRANT OF INTEREST-FREE LOAN
Loss on repayment of grant. 1,000,000
Cash 5,000,000 On January 1, 2014, an entity received an interest- free loan from
Dec 31 Depreciation 2,500,000 the national government for P5,000,000 for a period of three
Accumulated depreciation. 2,500,000 years evidenced by a promissory note.

Building 25,000,000 The market rate of interest for similar loan is 5%. The PV of 1 at
Accumulated Depreciation (7,500,000) 5% for three periods is 0.8638
Carrying Amount-12/31/2016. 17,500,000
The government granted the interest-free loan provided the
entity shall employ at least 40% of its workforce from the area
Deduction from asset approach
where the entity is located over the next three years.
2014
Jan 1 Building 25,000,000 SOLUTION:
Cash 25,000,000
1 Cash 5,000,000 DATE AMORT. DON PV
Building 5,000,000 1/1/2014 681,000 4,319,000
Dec 31 Depreciation 2,000,000 12/31/2014 215,950 465,050 4,534,950
Accumulated Depreciation. 2,000,000 12/31/2015 226,748 238,302 4,761,698
(20M/10) 12/31/2016 238,302 - 5,000,000

2015
Dec 31 Depreciation. 2,000,000 JOURNAL ENTRIES
Accumulated depreciation. 2,000,000 2014
Jan 1 Cash 5,000,000
2016 Discount on note payable. 681,000
Jan 1 Building 5,000,000 Note payable. 5,000,000
Cash 5,000,000 Deferred grant income 681,000
Dec 31 Depreciation 3,500,000 Dec 31 Interest expense 215,950
Accumulated Depreciation. 3,500,000 Discount on note payable. 215,950
31 Deferred grant income 215,950
Depreciation on original carrying amount 2,000,000 Grant income 215,950
Depreciation on increased carrying amount 1,500,000
(5,000,000/10yrs x 3 yrs) 2015
Total depreciation for 2016 3,500,000 Dec 31 Interest expense. 226,748
Discount on note payable. 226,748
Building (20M + 5M) 25,000,000 31 Deferred grant income. 226,748
Accumulated Depreciation (2M + 2M + 3.5M) (7,500,000) Grant income 226,748
Carrying Amount (12/31/16) 17,500,000
2016
Subsequent depreciation (17.5M/7) 2,500,000
Dec 31 Interest expense 238,202
Discount on note payable. 238,202
31 Deferred grant income 238,202
Grant income 238,202
31 Note payable 5,000,000
Cash 5,000,000
 BORROWING COSTS
4 SPECIFIC AND GENERAL BORROWING COSTS
4 SPECIFIC BORROWING
On January 1 of the current year, an entity borrowed P1,600,000 at
an interest of 10% specifically for the construction of a new building.
On January of the current year, an entity obtained a loan of
P4,000,000 at an interest rate of 10% specifically to finance the
The actual borrowing cost on this loan is P160,000 but interest of
construction of its new building. Availments from the loan were
P20,000 was earned from the temporary investment of the
made quarterly in equal amounts. Total borrowing cost incurred
proceeds prior to their disbursement.
amounted to P250,000 for the current year. Prior to their
disbursement, the proceeds of the borrowing were temporarily
The entity also had the following other loans in the current year
invested and earned interest income of P40,000.
which were borrowed for general purposes but the proceeds were
used in part for the construction of the building.
SOLUTION:
PRINCIPAL BORROWING COST
Actual borrowing cost 250,000 10% short-term loan 1,200,000 60,000
Less: Interest Income (40,000) 12% long-term loan 1,600,000 192,000
Capitalizable BC 210,000 2,800,000 252,000

4 GENERAL BORROWING The construction building started on Jan 1and was completed on
Dec 31 of the current year. Expenditures are:
An entity had the following borrowings on Jan 1 of the current
year. The borrowings were made for general purposes and the Jan 1 500,000
proceeds were partly used to finance the construction of a new April 1 1,000,000
building. May 1 1,000,000
Sept 1 1,000,000
Principal BC Dec 31 500,000
10% Bank loan 2,800,000 280,000 Total Cost 4,000,000
10% Short-term note 1,600,000 160,000
12% Long-term note 2,000,000 240,000
6,400,000 680,000 SOLUTION

The construction of the building was started on January 1 and was  Capitalization Rate = 252,000/2,800,000= 9%
completed on December of the current year. Expenditures on the  Weighted average expenditures
building were made as follows:
DATE
January 1 400,000 Jan 1 500,000 12/12 500,000
March 31 1,000,000 April 1 1,000,000 9/12 750,000
June 30 1,200,000 May 1 1,000,000 8/12 666,667
September 30 1,000,000 Sept 1 1,000,000 4/12 333,333
December 31 400,000 Dec 31 500,000 - -
4,000,000 2,250,00
SOLUTION:
 Capitalizable BC /Avoidable Costs

 Capitalization Rate = 680,000/6,400,000 = 10.625% Ave. expenditures 2,250,000

Specific BC (1,600,000) x 10%=160,000-20,000=140,000
 Weighted average expenditures: General BC 650,000 x 9% = 58,500
Total Capitalizable Costs 198,500
Date Expenditures Fraction Average
Jan 1 400,000 12/12 400,000  Total cost of the new building:
March 31 1,000,000 9/12 750,000 Actual expenditures 4,000,000
June 30 1,200,000 6/12 600,000 Borrowing costs 198,500
Sept 30 1,000,000 3/12 250,000 Cost of Bldg 4,198,500
Dec 31 400,000 - -
2,000,000

 Avoidable cost-General BC: 2,000,000 x 10.625% = 212,500

VS
(LOWER) 680,000
 General (8.1M x12%) 972,000
Total cost of new building to date-12/31/2015 11,872,000

4 Construction period of more than one year 4 More than one year but less than 2 years

An entity had the following loans outstanding during 2014 and Assume the same date except that the building was completed on
2015 August 31,2015.

Specific construction loan  Capitalizable BC/Avoidable Costs (2014)

General loan Actual expenditures-2014 9,000,000
Capitalizable BC in 2014:
The entity began the self-construction of a new building on Jan 1, Specific (2M x 15%) 300,000
2014 and the building was completed on Dec 31, 2015. The General (2.5M x12%) 300,000
following expenditures were made during 2014 and 2015: Total cost of new building to date-12/31/2014 9,600,000

Jan 1, 2014 2,000,000  Weighted average expenditures (2015)

July 1, 2014 4,000,000
Nov 1, 2014 3,000,000 DATE
July 1, 2015 1,000,000 Jan 1 9,600,000 8/8 9,600,000
July 1 1,000,000 6/8 250,000
10,600,000 9,850,000
SOLUTION:

 Weighted average expenditure (2014)

 Capitalizable BC/Avoidable Costs (2015)
DATE
Jan 1 2,000,000 12/12 2,000,000 Ave expenditures(2015) 9,850,000
July 1 4,000,000 6/12 2,000,000 Specific BC (2,000,000)
Nov 1 3,000,000 2/12 500,000 General BC 7,850,000
4,500,000
Actual expenditures-2015 10,600,000
Capitalizable BC in 2014:
 Capitalizable BC/Avoidable Costs (2014) Specific (2M x 15% x 8/12) 200,000
General (8.1M x12% x 8/12) 628,000
Ave expenditures(2014) 4,500,000 Total cost of new building to date-12/31/2015 11,428,000
Specific BC (2,000,000)
General BC 2,500,000
4 SPECIFIC BORROWING FOR ASSET USED FOR GENERAL
Actual expenditures-2014 9,000,000 PURPOSES
Capitalizable BC in 2014:
Specific (2M x 15%) 300,000 At the beginning of the current year, an entity incurred a loan of
General (2.5M x12%) 300,000 P6,000,000 at an interest of 10% specifically for the construction
Total cost of new building to date-12/31/2014 9,600,000 of a building. Availments from the loan were made quarterly in
equal installments.

 Weighted average expenditure (2015) The entity, however, used part of the proceeds of the loan for
working capital requirements. Total borrowing costs amounted to
DATE P400,000. Construction began at the beg of the year and
Jan 1 9,600,000 12/12 9,600,000 completed year end. The total cost of the building was
July 1 1,000,000 6/12 500,000. P6,000,000 which was incurred evenly.
10,600,000 10,100,000
 Weighted average cost: P6,000,000/2= P3,000,000
 Capitalizable BC/Avoidable Costs (2015)  Capitalizable BC: P3,000,000 x 10% = P300,000
 Shall be treated as general borrowings
Ave expenditures(2015) 10,100,000
Specific BC (2,000,000)
General BC 8,100,000

Actual expenditures-2015 10,600,000

Capitalizable BC in 2014:
Specific (2M x 15%) 300,000
 X Cap. Rate 8.7%
Avoidable BC-GENERAL 18,850
Avoidable BC-Specific (P866,667x 0.12) 104,000
TOTAL AVOIDABLE COST-2019 P 122,850

ILLUSTRATION: COMPREHENSIVE  PRTC METHOD

Lodi Company constructs its own stores. 1/1 (P 1,838,850 x 12/12) P1,838,850
Additional information follows: 3/1 (P 700,000 x 10/12) 583,333
9/1 (P 400,000 x 4/12) 133,333
Total construction expenditures: 12/31 (P500,000 x 0/12) -
Jan 2, 2019 P600,000 Weighted Ave. Exp. (WAE) 2,555,516
May 1, 2019 600,000 Total: P 1,700,000 Specific BC (1,000,000)
Nov 1, 2019 500,000 General BC 1,555,516
March 1, 2020 700,000 X Cap. Rate 8.7%
Sept 1, 2020 400,000 Total: P 1,600,000 Interest on WAE-General 135,330
Dec 31, 2020 500,000 LOWER
Actual BC-General [(P500K x 10%) + (P1M x 8%)] 130,000
Outstanding company debt: Avoidable BC-Specific (P1M x 12%) 120,000
Mortgage related directly to new store; Total avoidable BC-2020 250,000
Interest rate, 12%; term 5 years from
beginning of construction P 1,000,000 Interest expense: 135,330-130,000= 5,330

General liability:  KIESO/WEYGANT METHOD

Bonds issued just prior to construction of
Store; interest rate, 10% for 10 years P 500,000 1/1 (P 1,827,250 x 12/12) P1,827,250
3/1 (P 700,000 x 10/12) 583,333
Bonds issued just prior to construction; 9/1 (P 400,000 x 4/12) 133,333
Interest rate, 8%, mature in 5 ears P 1,000,000 12/31 (P500,000 x 0/12) -
Weighted Ave. Exp. (WAE) 2,543,916
Estimated cost of equity capital 14% Specific BC (1,000,000)
General BC 1,543,916
FIND: LOWER X Cap. Rate 8.7%
1. The capitalizable borrowing cost for 2019 Interest on WAE-General 134,321
2. Capitalizable borrowing cost for 2020
Actual BC-General [(P500K x 10%) + (P1M x 8%)] 130,000
Avoidable BC-Specific (P1M x 12%) 120,000
 PRTC Method Total avoidable BC-2020 250,000

½ (P600,000 x 12/12) P600,000 Interest expense: 134,321-130,000= 4,321

5/1 (P600,000 x 8/12) 400,000
11/1 (P500,000 x 2/12) 83,333  STICE/SKOUSEN
Weighted Ave Exp (WAE) 1,083,333
Specific BC [P600K + (P400K x 8/12)] (866,667) 1/1 (P 1,827,250 x 12/12) P1,822,850
General BC 216,667 3/1 (P 700,000 x 10/12) 583,333
X Cap. Rate 8.7% 9/1 (P 400,000 x 4/12) 133,333
Avoidable BC-GENERAL 18,850 12/31 (P500,000 x 0/12) -
Avoidable BC-SPECIFIC(P1Mx0.12) 120,000 Weighted Ave. Exp. (WAE) 2,539,516
TOTAL AVOIDABLE BC-2019 P138, 850 Specific BC (1,000,000)
General BC 1,539,516
 KIESO/WEYGANT METHOD X Cap. Rate 8.7%
Interest on WAE-General 133, 938
Weighted ave. expenditure P 1,083,333
Specific BC (1,000,000) Actual BC-General [(P500K x 10%) + (P1M x 8%)] 130,000
General BC 83,333 Avoidable BC-Specific (P1M x 12%) 120,000
X Cap. Rate 8.7% Total avoidable BC-2020 250,000
Avoidable BC-GENERAL 7,250
Avoidable BC-Specific (P1M x 0.12) 120,000 Interest expense: 133,938-130,000= 3,938
TOTAL AVOIDABLE COST-2019 P 127,250

 STICE/SKOUSEN
Weighted ave. expenditure P 1,083,333
Specific BC [P600K + (P400K x 8/12)] (866,667)
General BC 216,666
MACHINERY 4 Separate identification is not practicable

ACCOUNTING FOR MAJOR REPLACEMENT Assume the same data except it is not practicable to identify the
cost of the specific part replaced (cost of replaced part is not
4 Separate identification is practicable known)

A building having a useful life of 20 years is constructed at a total 1. To eliminate the original cost of the wooden roof:
cost of P5,000,000.

After 10 years, the wooden roof is replaced with a concrete Loss on retirement of building 139,500
roofing costing P500,000. A study of the original construction Accumulated Depreciation 139,500
records reveals that P400,000 is an accurate estimate of the Building 279,000
original cost of the wooden roof. (279,000/20yrs x 10 yrs)

SOLUTION: 2. To record the replacement

Building 500,000
Journal entries Cash 500,000
1. To eliminate the original cost of the wooden roof:

Loss on retirement of building 200,000 4. To record subsequent annual depreciation

Accumulated Depreciation 200,000 Depreciation 286,050
Building 400,000 Accumulated Depreciation 286,050
(400,000/20yrs x 10 yrs)

Building (5,000,000-279,000 + 500,000) 5,211,000

2. To record the replacement Accumulated Depreciation (2,500,000-139,500) 2,360,500
Building 500,000 Carrying Amount 2,860,500
Cash 500,000
Annual Depreciation (2,860,500/10 years remaining) 286,050

3. To record subsequent annual depreciation

Depreciation 280,000
Accumulated Depreciation 280,000

Building (5,000,000-400,000 + 500,000) 5,100,000

Accumulated Depreciation (2,500,000-200,000) 2,300,000
Carrying Amount 2,800,000

Annual Depreciation (2,800,000/10 years remaining) 280,000

 Machinery-at cost 8,000,000
Divide: Annual depreciation at cost 400,000
Original useful life 20 years

REVALUATION  Proportional Approach

ILLUSTRATION 1 Replacement Cost Cost Appreciation

12,000,000 (100%) - 8,000,000. = 4,000,000 Machinery
The following data pertain to a machinery on the date of (3,000,000) (25%) - (2,000,000) = (1,000,000) Acc. Dep.
revaluation: 9,000,000. (75%) - 6,000,000 = 3,000,000 SV/CA/RS

COST Replacement Cost % of depreciation = ADC/COST

Machinery 3,000,000 4,800,000 = Yrs expired/Original UL
Accumulated Depreciation 750,000 1,200,000
SOLUTION: % of depreciation: 5 yrs/20 yrs = 25%
 Formula 2,000,000/8,000,000 = 25%

RC - COST = Appreciation Journal entry:

(ADRC) - (ADC) = (ADA)
Machinery 4,000,000
SV/DRC - CA = RS
Accumulated Depreciation 1,000,000
Revaluation Surplus 3,000,000
RC = Replacement Cost
ADRC = Accumulated Depreciation-Replacement Cost
ADC = Accumulated Depreciation-Cost  Elimination Approach
ADA = Accumulated Depreciation-Appreciation
SV/DRC = Sound Value or Depreciated Replacement Cost Replacement Cost Cost Appreciation
CA= Carrying Amount 12,000,000 (100%) - 8,000,000. = 4,000,000 Machinery
RS = Revaluation Surplus (3,000,000) (25%) - (2,000,000) = (1,000,000) Acc. Dep.
9,000,000. (75%) - 6,000,000 = 3,000,000 SV/CA/RS

4,800,000 - 3,000,000. = 1,800,000 Machinery Journal entry:

(1,200,000) - (750,000) = (450,000) Acc. Dep. Accumulated Depreciation 2,000,000
3,600,000 - 2,250,000 = 1,350,000 SV/CA/RS Machinery 2,000,000

 Statement presentation and classification

Effect: the journal entry is to reduce the accumulated depreciation to
Machinery 4,800,000 zero and leave the machinery account with a net debit balance of
Accumulated Depreciation (1,200,000) P6,000,000.
Sound Value/DRC 3,600,000
Machinery 3,000,000
 Notes to financial statement Revaluation surplus 3,000,000
COST RC
Machinery 3,700,000. 4,800,000 Effect: Machinery account is adjusted to conform with the revalued
Accumulated Depreciation (750,000) (1,200,000) amount (depreciated replacement cost or sound value) of P
Carrying Amount/Sound value 2,250,000 3,600,000 9,000,000.

ILLUSTRATION 2: Proportional and Elimination Approach

Comparison

QUERY: What is the subsequent treatment of revaluation

The following date pertain to a machinery on revaluation date: surplus? (Both proportional and elimination approach)
Cost Replacement Cost
Machinery 8,000,000 12,000,000 P Revaluation surplus – a component of OTHER
Accumulated Depreciation 2,000,000 COMPREHENSIVE INCOME
P A revaluation surplus can be transferred directly to
The machinery was revalued 5 years from the date of acquisition
retained earnings = WHEN REALIZED

SOLUTION:
The original useful life is determined as follows:
Realized when: 1. Retirement
Accumulated depreciation-Cost 2,000,000 2.Disposal
Divide: Age of machinery 5 years 3. Depreciated
Annual depreciation 400,000
 The revaluation surplus is allocated or realized over the
remaining useful life of the asset and reclassified through
retained earnings

Piecemeal realization of revaluation surplus

ILLUSTRATION 4: With residual value
From previous illustration:
The following date pertain to a machinery on revaluation date:
Replacement Cost Cost Appreciation Cost Replacement Cost
12,000,000 (100%) - 8,000,000. = 4,000,000 Machinery Machinery 8,500,000 12,400,000
(3,000,000) (25%) - (2,000,000) = (1,000,000) Acc. Dep. Residual Value 500,000
9,000,000. (75%) - 6,000,000 = 3,000,000 SV/CA/RS Accumulated Depreciation 3,200,000

Annual depreciation: The original useful life is 10 years but the revaluation shows a
revised useful life of 12 years from the date of acquisition.
Depreciation (9,000,000/15) 600,000
Accumulated Depreciation 600,000
SOLUTION:
Depreciation on cost (6,000,000/15) 400,000 Annual depreciation cost (8,500,000-500,000/10 yrs) 800,000
Depreciation on appreciation (3,000,000/15) 200,000
Depreciation on revalued amount 600,000 Age of machinery (3,200,000/800,000) 4 years

Piecemeal realization of the revaluation surplus: Percentage of accumulated depreciation

Revaluation Surplus (3,000,000/15) 200,000 (4 yrs expired/ 10 yrs) 40%
Retained earnings 200,000
Remaining years (12 yrs – 4 yrs) 8 years

ANOTHER APPROACH:
ILLUSTRATION 3 : There is a change in useful life Proportion of the accumulated dep.
to the orig. depreciable amount (3,200,000/8,000,000) 40%
The following date pertain to a building on revaluation date:
Cost Replacement Cost Age of machinery (40% x 10 yrs) 4 years
Building 9,000,000 15,000,000
Accumulated Depreciation 2,700,000
Replacement Cost Cost Appreciation
The original useful life of the building is 10 years but the revaluation 12,400,000 - 8,500,000. = 3,900,000 Building
reveals a revised useful life of 15 years from the date of acquisition. 400,000 400,000 Residual Value
12,000,000 - 8,100,000 = (1,800,000) Depreciable Amt.
SOLUTION: 4,800,000 - 3,200,000 = 1,600,000 Acc. Dep. (40%)
7,200,000 - 4,900,000 = 2,300,000 SV/CA/RS
Replacement Cost Cost Appreciation
15,000,000 (100%) - 9,000,000. = 6,000,000 Building Journal entries:
(4,500,000) (30%) - (2,700,000) = (1,800,000) Acc. Dep.
10,500,000. (70%) - 6,300,000 = 4,200,000 SV/CA/RS 1. To record revaluation
Machinery 3,900,000
1. To record revaluation Accumulated Depreciation 1,600,000
Building 6,000,000 Revaluation Surplus 2,300,000
Accumulated Depreciation 1,800,000
Revaluation Surplus 4,200,000 2. To record subsequent annual depreciation

Depreciation (7,200,000/8) 900,000

2. To record subsequent annual depreciation
Accumulated Depreciation 900,000
Depreciation (10,500,000/12) 875,000
Accumulated Depreciation 875,000
3. To record piecemeal revaluation
Remaining revised useful life: 15 yrs – 3 yrs = 12 yrs
Revaluation surplus (2,300,000/8) 287,500
Retained Earnings 287,500
3. To record piecemeal revaluation

Revaluation surplus (4,200,000/12) 350,000

Retained Earnings 350,000
 Accumulated depreciation. 1,200,000
Revaluation surplus 1,800,000
Depreciation 800,000
Accumulated depreciation 800,000
(4,800,000/6yrs remaining)

ILLUSTRATION 5: Reversal of a revaluation increase Revaluation Surplus. 300,000

The historical cost of the land is P5,000,000 and the land Retained Earnings 300,000
was revalued upward to P6,000,000 three years ago, as
follows: 2015
Depreciation 800,000
Land 1,000,000 Accumulated depreciation 800,000
Revaluation surplus 1,000,000 Revaluation Surplus. 300,000
Retained Earnings 300,000
In the current year, the fair value of the land has fallen to
P3,500,000 or a revaluation decrease of P2,500,000. The 2016
revaluation decrease will be recorded as follows:
Depreciation 800,000
Accumulated depreciation 800,000
Revaluation surplus 1,000,000
Revaluation Surplus. 300,000
Revaluation loss or impairment loss 1,500,000
Retained Earnings 300,000
Land 2,500,000

ILLUSTRATION 6: Reversal of a revaluation decrease On Dec 31, 2016, if the journal entry are properly posted, the
adjusted balances are:
A land with cost of P5,000,000 was revalued downward to
conform with the fair value of P4,000,000 by reason of Equipment 8,000,000
slump in land value. Accumulated depreciation (5,600,000)
Depreciated replacement cost 2,400,000
Revaluation loss 1,000,000
Land 1,000,000 Revaluation surplus (1,800,000-900,000) 900,000

However, in the current year, there has been a surge in land

On January 1 , 2017, the fair value of the equipment is determined
prices and the land has now a fair value of P5,500,000
to be P1,050,000. Since the depreciated replacement cost on Dec 31,
2016 is P2,400,000, there is a revaluation decrease of P1,350,000
Land (5,500,000-4,000,000) 1,500,000
Revaluation gain 1,000,000
The revaluation decrease is first charged against revaluation surplus
Revaluation surplus 500,000
of P900,000 and the remainder of P450,000 to revaluation loss.
Per Book Adjusted Decrease
ILLUSTRATION: Reversal of revaluation increase 8,000,000 3,500,000 4,500,000
Replacement cost
On January 1, 2014, the statement of financial position AD (70%) (5,600,000) (2,450,000) (3,150,000)
shows the following data concerning an equipment: Depreciated replacement 2,400,000 1,050,000 1,350,000
cost
Equipment, cost 40%
Accumulated Depreciation 8,000,000
(10 yr life, 4 yrs expired) Accumulated depreciation 3,150,000
Revaluation surplus 900,000
On the same date, the equipment is revalued at a Revaluation loss 450,000
depreciated replacement cost or sound value of Equipment 4,500,000
P4,800,000.

SOLUTION:  Subsequent depreciation: 1,050,000/3 = 350,000

Proportion of accumulated depreciation (P2M/5M) 40%

Gross replacement cost(4.8M/60%) 8,000,000

Replacement Cost Cost Appreciation

8,000,000 (100%) - 5,000,000. = 3,000,000 Equipment
(3,200,000) (40%) - (2,000,000) = (1,200,000) Acc. Dep.
4,800,000 (60%) - 3,000,000 = 1,800,000 SV/CA/RS

Journal Entries:
2014
Equipment. 3,000,000
WASTING ASSET
ILLUSTRATION 3: Depreciation of mining property
ILLUSTRATION 1
A wasting asset entity has acquired the right to use a UL of Equipment – STRAIGHT LINE METHOD
property to explore a natural resource. The acquisition cost SHORTER normally used
is P3,000,000, the related exploration costs amount to
P2,000,000, and development costs incurred in erecting UL of wasting asset – OUTPUT METHOD
wells and drilling the deposit are P5,000,000. Total costs of normally used
the wasting asset therefore amount to P10,000,000.
However if: Mining equipment is MOVABLE and CAN BE USED FOR
SOLUTION: FUTURE PROJECT = Equipment is depreciated over its useful life
using STRAIGHT LINE METHOD.
 It is estimated that the resource deposit is approximately
1,000,000 units. The depletion rate per unit is computed as
A natural resource deposit is estimated to contain 450,000 units.
follows:
Heavy equipment necessary to extract the deposit is acquired at a
P10,000,000 cost of P9,000,000. The useful life of the equipment is 10 years.
Depletion rate per unit =
1,000,000 units
= P10
 If it is estimated that 30,000 units will be extracted each
year:

 If 250,000 units are extracted in the first year: Wasting asset useful life: 450,000 units /30,000
SHORTER units = 15 years
Depletion = Rate per unit x Units extracted
= P10 x 250,000 units Equipment useful life: 10 years
= P 2,500,000  If it is estimated that 50,000 units will be extracted each
year:
Classified as part of: - COST OF PRODUCTION
- COST OF SALES Wasting asset useful life: 450,000 units /50,000
units = 9 years
SHORTER
 Statement of Financial Position Presentation:
Equipment useful life: 10 years
Resource deposit-At Cost 10,000,000
Accumulated Depreciation (2,500,000) The depreciation for the first year for the EQUIPMENT is computed
Carrying Amount 7,500,000 as follows:

ILLUSTRATION 2: Revision of depletion rate Depreciation per unit (9M/450k units) = P20
Depreciation (50,000 units extracted x P20) = P1,000,000
Assume in the preceding example, additional development
costs of P3,750,000 are incurred in the second year, and 4 ILLUSTRATION 4: Shutdown
recoverable deposits are estimated to be 1,250,000 units at
the beginning of the second year. In the preceding example, if there is a shutdown in the second year,
the depreciation is determined as follows:
 Depletion rate per unit (2nd year)
Equipment at cost 9,000,000
Original cost of wasting asset 10,000,000 Accumulated Depreciation (1,000,000)
Additional development costs in second year 3,750,000 Carrying Amount (Beg. Of 2nd yr.) 8,000,000
Total 13,750,000
Accumulated Depreciation (2,500,000) Depreciation for 2nd year – End of the yr. (8,000,000/9 yrs)
Remaining depletable amount 11,500,000 P888,888

Depletion rate per unit (11,500,000/1,250,000) P9.00 If in the third year, operations are resumed and 60,000 units are
extracted, depreciation for equipment is:

 If 300,000 units are extracted in the second year:

Equipment at cost 9,000,000
Accumulated Depreciation (P1M + 888,888) (1,888,888)
Depletion (300,000 units x P9) 2,700,000
Carrying Amount (Beg. Of 3rd yr.) 7,111,112
Accumulated Depreciation 2,700,000
 Original estimate of deposit 450,000 units
Less: Extracted in First Year 50,000 units
Remaining estimate of deposit 400,000 units

ILLUSTRATION 6: Wasting Asset Doctrine

Depreciation rate per unit
(7,111,112/400,000) 17.78 The following data are available at the current year-end:

Depreciation for the third year Wasting asset, at cost 8,000,000

(60,000 units x P17.78) P 1,066,800 Accumulated depletion 3,000,000
Share capital 5,000,000
4 ILLUSTRATION 5: Wasting Asset Doctrine Capital liquidated 500,000
Retained Earnings 2,000,000
Depletion for the current years based on 50,000 units 1,000,000
FORMULA IN DETERMINING THE MAXIMUM DIVIDEND THAT CAN Extracted at P20 per unit
BE DECLARED AND PAID BY A WASTING ASSET CORPORATION Inventory of resource deposit (5,000 units) 300,000

Retained Earnings xx SOLUTION:

ADD: Accumulated depletion xx Computation of maximum dividend
Total xx
LESS: Capital liquidated in prior years xx Retained Earnings 2,000,000
Unrealized depletion in ending inventory xx xx ADD: Accumulated depletion 3,000,000
MAXIMUM DIVIDEND xx Total 5,000,000
LESS: Capital liquidated in prior years 500,000
Unrealized depletion in ending inventory 100,000 (600,00)
A wasting asset corporation showed the following accounts: MAXIMUM DIVIDEND 4,400,000

Wasting asset, at cost 1,000,000 If the amount of P4,400,000 is declared as dividend at year-end:
Accumulated Depreciation 100,000
Retained Earnings 200,000 Retained Earnings 2,000,000
Capital Liquidated 1,000,000
The maximum dividend than can be declared by the wasting asset Dividends Payable 4,400,000
corporation would be P300,000, the retained earnings balance of
P200,000 plus accumulated depletion balance of P100,000
 Capital Liquidated = P500,000 + P2,400,000
= P2,900,000
If the maximum amount is declared as dividend:
DEDUCTION from Total Shareholders’
Equity
Retained Earnings 200,000
Capital Liquidated 100,000
Dividends Payable 300,000

The dividend of P100,000 in excess of the retained earnings balance

is actually a liquidating dividend and thus accounted for as a return
of capital to the shareholders.

Although this dividend is based on the accumulated depletion

balance, the accumulated depletion account is NOT charged
(recorded) because the same is NOT A SOURCE OF DIVIDEND unlike
retained earnings.

The accumulated depletion balance is used only for purposes of

determining how much capital can be legally returned to
shareholders.

CAPITAL LIQUIDATED = Deduction from the total

shareholders’ equity

DEPLETION OF MINERAL RESOURCES (PFRS 6) MILLAN
4 OBJECTIVE
P Specifies the financial reporting for the exploration for
and evaluation of mineral resources
4 SCOPE
P Applies to the exploration and evaluation expenditures
incurred by an entity
P Does not address other aspects of accounting by entities
engaged in the exploration for and evaluation of mineral
resources
 An entity shall NOT apply PFRS 6 to expenditures
incurred:
r BEFORE the exploration for and evaluation
of mineral resources such as: Expenditures
incurred BEFORE the entity has obtained
the legal rights to explore a specific area
r AFTER the technical feasibility and
commercial viability of extracting a mineral
resource are demonstrable
4 TEMPORARY EXEMPTION FROM HIERARCHY OF REPORTING
STANDARDS UNDER PAS 8
 PAS 8 provides that in the selection of its accounting
policies, an entity should consider the following in
descending order:
1. Philippine Financial Reporting Standards (PFRS)
2. Judgement that results in information that is
relevant and reliable– in the absence of a standard or
an interpretation that specifically applies to a
transaction, other event or condition
 In making Judgment, management must refer to, and
consider the applicability of the following sources in
descending order:
3. The requirements and guidance in PFRSs dealing with
similar and related issues
4. The definition, recognition criteria and measurement
concepts for assets, liabilities, income and expenses in
the Conceptual Framework
 In making judgement, management may also consider
a. The most recent pronouncements of other
standard-setting bodies that use a similar conceptual
framework to develop accounting standards
b. Other accounting literature and accepted industry
practices, to the extent that this does not conflict
with PFRSs and Conceptual Framework
P PFRS 6 temporarily exempts an entity from applying all of
the above provisions of PAS 8
P PFRS 6 permits entities to develop their own accounting
policy which results in relevant and reliable information
based entirely on management’s judgement and without
the need to consider the hierarchy of standards.
4 MEASUREMENT AT RECOGNITION
P At COST
4 ELEMENTS OF COST OF EXPLORATION AND EVALUATION
ASSETS
 The following are examples of expenditures that MIGHT
be included in the initial measurement of exploration
and evaluation assets (list not exhaustive)
a. Acquisition of rights to explore
b. Topographical, geological, geochemical and
geophysical studies
c. Exploratory drilling
d. Trenching
e. Sampling
f. Activities in relation to evaluating the technical
feasibility and commercial viability of extracting a
mineral resource
r Expenditures related to the DEVELOPMENT of mineral
resources is NOT recognized as exploration and evaluation
assets
4 RESTORATION COSTS
P An entity recognizes any obligations for removal and
restoration that are incurred during a particular period
as a consequence of having undertaken the exploration
for and evaluation of mineral resources
4 MEASUREMENT AFTER RECOGNITION
P Shall apply either COST MODEL or REVALUATION
MODEL
4 CHANGES IN ACCOUNTING POLICIES
P May change if the change makes the financial statements
more relevant to the economic decision-making needs of
users and more reliable to those needs
P An entity shall judge relevance and reliability using the
criteria in PAS 8
4 CLASSIFICATION OF EXPLORATION AND EVALUTION ASSETS
P Shall classify as tangible or intangible – according to the
nature of the assets acquired and apply the classification
consistently
P Example of tangible exploration and evaluation assets:
 Vehicles
 Drilling Rigs
P Example of intangible exploration and evaluation assets:
 Drilling rights
4 RECLASSIFICATION OF EPLORATION AND EVALUATION
ASSETS
 P Shall NO LONGER be classified as such when: the
TECHNICAL FEASIBILITY AND COMMERCIAL VIABILTY of
extracting the mineral resources are demonstrable
P Shall be assessed for IMPAIRMENT, and any impairment
loss be recognized, before reclassification.
4 IMPAIRMENT LOSS
P Impaired = CA > RA (Carrying Amount > Recoverable
Amount)
P An entity shall measure, present and disclose any resulting
impairment loss in accordance with PAS 36 Impairment of
Assets, except for the treatment of the allocation of
impairment loss on assets within cash-generating units
wherein management is allowed to determine its own
policy for the allocation.
 Facts and circumstances than an entity should test
exploration and evaluation assets for impairment:
a. The period for which the entity has the right to
explore in the specific area has expired and it is
not expected to be renewed
b. Substantive expenditure on further exploration
for an evaluation is neither budgeted nor
planned
c. Exploration for and evaluation of mineral
resources in the specific area have not led to the
discovery of commercially viable quantities of
mineral resources and the entity has decided to
discontinue such activities in the specific area
d. The carrying amount of the exploration and
evaluation asset is unlikely to be recovered in
full from successful development or by sale
4 DISCLOSURE
P Shall disclose information that identifies and explains the
amounts recognized in its financial statements.
P The entity shall also disclose:
 Accounting policies
 Amounts of assets, liabilities, income and
expenses and operating and investing cash flows
arising from exploration for evaluation of
mineral resources.
P Shall treat exploration and evaluation assets as a:
SEPARATE CLASS OF ASSETS
4 NATURAL RESOURCES
P Also called: Wasting Assets
P Two main features:
1. The complete removal (physical consumption) of the
asset
2. The replacement of the asset only by an act of nature
 Unlike PPE, they are consumed physically over
the period of use and do not maintain their
physical characteristics.
4 COST OF NATURAL RESOURCES
P Three types of costs incurred in acquiring and
preparing natural resources:
1. Purchase Price
 Direct costs
 Restoration Costs
2. Exploration costs
- amounts paid to find the natural resource after
legal right to explore has been obtained
3. Development Costs
- amounts paid to prepare the resource site for mining
- includes:
 Drilling costs
 Costs of construction of tunnels, shafts
and wells
4 ACQUISITION COSTS
P Price paid to obtain the property right to search and find
an undiscovered natural resource
P Can also be price paid for an already discovered resource
P Generally, acquisition cost of natural resources is recorded
in an account title: “Undeveloped property”
If exploration is successful: Entity later assigns the
cost to the natural resource
If not successful: It writes off the acquisition cost as
impairment loss
4 EXPLORATION COSTS
P A soon as the entity has obtained the legal right to explore
the property, it incurs exploration costs.
P These costs are accounted for in accordance with the
entity’s accounting policy developed based on
managements’
Capitalized = if management judges that it should be
capitalized
Expensed outright = if management judges that it should
be expensed
Reason why PFRS does not provide specific provisions for the
accounting of exploration costs: Because of the varying
treatments among extractive industries.
4 DEVELOPMENT COSTS
P As soon as it is established that natural resource
actually exists in a property
P Has two parts:
1. Tangible equipment costs
- not capitalized as cost of natural resource but
capitalized as equipment and depreciated
separately
- Ex: transportation and other heavy equipment
2. Intangible development costs
- capitalized as part of the natural resource
- Ex: drilling costs, tunnels, shafts and wells
4 RESTORATION COSTS
P Costs entities incur to restore property to its natural
state after extraction has occurred
P CAPITALIZED as part of the cost of natural resource to
the extent the entity has a present obligation.
P Amount = FV of the obligation to restore the property
after extraction.
 COST OF NATURAL RESOURCE

1. Purchase Price (Direct Costs + Restoration Costs)

2. Exploration Costs (to the extent they are capitalize in
accordance with company policy)
3. Intangible development costs
P Only intangible development costs form part of the
depletion base of the natural resource
P Tangible equipment costs are depreciated separately

4 DEPLETION
4 LIQUIDATING DIVIDEND
Depletion rate per unit = Depletion base / Total Est. Deposits
Depletion = Depletion rate per unit x Actual units extracted
 Depletion period
Begins = when natural resources starts to be extracted
Ends = when natural resource is physically consumed
or derecognized
NOTE: No depletion is recognized in periods where no
natural resource is extracted
P Any amount declared in excess of the unrestricted
retained earnings
P For wasting asset corporation, the wasting asset doctrine
applies rather than the trust fund doctrine
P Wasting asset doctrine:
- Dividends can be declared not only to the extent of
unrestricted retained earnings but also for the balance in
accumulated depletion to the extent that it is realized
and not yet liquidated

 Depletion method
P Computed using the units-of-production Maximum amount that can be declared as
method (activity method or variable-charge dividends:
method)
P Depletion charge each period shall form part Unrestricted Retained Earnings xx
of the cost of inventory. Add: Accumulated Depletion xx
P Depletion charge is recognized as expense, Total xx
part of COGS, when inventory is sold. Less: Capital Liquidated xx
Depletion in ending inventory xx xx
4 DEPLETION OF MINING EQUIPMENT Maximum amount of dividend xx

DEVELOPMENT COSTS:

1. Intangible development costs Forms part of the cost 4 SUBSEQUENT ACCOUNTING FOR DECOMMISSIONING AND
of natural resource RESTORATION COSTS
Depreciated together P Initial estimate: Included as part of the depreciable
with the natural amount of the PPE of depletion base of a natural resource
resource to the extent that a present obligation is incurred.

2. Tangible development costs Recognized and  Present obligation

depreciated P May arise from legal obligation or constructive
separately obligation
P If an entity does not have a present obligation,
a. Movable Depreciated over its NO PROVISIONS for restoration and
own useful life using decommissioning costs are recognized
any depreciation P Present obligation due to constructive obligation:
method it is when an entity is neither required by law nor
contract to restore or decommission properties
b. Immovable Depreciated over the but are expected to do so because of past
SHORTER of the practices.
equipment’s useful
life and the mine’s  Initial recognition
useful life P FAIR VALUE of the estimated liability as of initial
recognition – amount of decommissioning or
1. If equipment life
restoration costs
is shorter:
P Alternatively, entities may use PV techniques to
depreciate the
estimate fair value.
immovable
P When making estimate of FV by discounting
equipment using
estimated cash outflows, the discount rate used
any depreciated
method
2. If mine’s life is
shorter,
 shall be the pre-tax rate that reflects current P If decrease in liability exceeds the carrying amount of the
market assessments of the time value of money asset = Excess shall be recognized immediately in PROFIT
and the risks specific to the liability OR LOSS
P Discount rate shall not reflect risks for which P If the adjustment results in an addition to the cost of an
future cash flows estimates are adjusted. asset= Must consider if its impaired
P After change in estimate, the depreciable or depletion
 Making the estimate of provision base of the related asset shall be allocated over the
P PAS 37 provides the best estimate of the remaining useful life.
expenditure required to settle the present
obligation:
1. Expected Value – involves large population
of items, estimated by weighing all possible
outcomes by their associated probabilities
2. Mid-point of the range- when there is a
continuous rang of possible outcomes and
each point is unlikely as the other.

 Recording the provision

P Asset retirement obligation (ARO)
- the fair value of the obligation for restoration and
decommissioning costs is recorded under this
- with a debit to the related asset for the same amount
- an entity recognizes an asset retirement obligation as
part of the related asset because these costs are tied to
operating the asset and are necessary to prepare the
asset for its intended use
- therefore the specific asset should be increased
because the future economic benefit comes from the
use of this productive asset

 Subsequent measurement
P Amount of the decommissioning cost or restoration cost
is included in the depreciable amount or depletion base
of the asset and allocated over the useful life of the asset
as depreciation or depletion charge.

 Decommissioning and restoration costs included as cost of

non-depreciable asset
P PAS 16 provides that if the cost of land includes the costs
of site dismantlement, removal and restoration, that
portion of the land asset is depreciated over the period
of benefits obtained by incurring those costs
P In some case, the land itself may have a limited useful
life, in which case it is depreciated in a manner that
reflects the benefits to be derived from it.

 Unwinding of discount
P IFRIC 1 states that the periodic unwinding of the
discount on the liability recognized for the
decommissioning or restoration cost shall be recognized
in profit or loss as a finance cost as it occurs
Capitalization under PAS 23: Borrowing Cost – NOT
PERMITTED

 Changes in estimates
P Change in accounting estimate and treated prospectively
under PAS 8 – change in the estimated cash outflow for
the liability recognized for decommissioning/ restoration
costs or changes in the current market-based discount
rate
P Added or Deducted from the cost of the related asset –
changes in the liability
P Amount deducted = Must not be > than the carrying
amount
  Solution:
(105,000−5,000)
Annual Depreciation = =
5
P20,000
Or:
100 %
Straight line rate = = 20% x P100,000 = P20,000
5 yrs
DEPRECIATION
P 100,000
Useful Life = = 5 years
METHODS OF DEPRECIATION P 20,000
1. Equal or uniform charge methods Depreciable Amount = P20,000 x 5 years = P100,000
a. Straight line  Journal Entry
b. Composite method
c. Group method
2. Variable charge or use-factor methods Depreciation Expense 20,000
a. Working hours or service hours Accumulated Depreciation 20,000
b. Output or production method
3. Decreasing charge or accelerated or diminishing balance  Statement Presentation
methods
a. Sum of years’ digits Equipment 105,000
b. Declining balance method Accumulated Depreciation (20,000)
c. Double declining balance Carrying Amount 85,000
4. Other methods
a. Inventory or appraisal
b. Retirement method
c. Replacement method B. Composite Method

------------------------------------------------------------------------------------------- FORMULAS:
EQUAL OR UNIFORM CHARGE METHODS
Composite Life =
A. Straight line method ( Cost−Residual Value )∨Total Depreciable Amount
FORMULAS: Total Annual Depreciation

(Cost −Residual Value) Total Annual Depreciation

Annual Depreciation = Composite Rate =
Useful life(Yrs) Total Cost
Depreciable Amount = (Annual Depreciation) x (Useful life)
Depreciable Amount
Useful Life =
Annual Depreciation (Cost −Residual Value)
Annual Depreciation =
Depreciable Amount = (Annual Depreciation) x (Useful life) Useful life(Yrs)

100 % 4 ILLUSTRATION
Straight line rate =
P Adopted when the Usefullife ∈ years
principal cause of depreciation is the
passage of time Asset Cost RV DA UL AD
P Considers depreciation as a function of time rather than
as a function of usage Building 650,000 50,000 600,000 15 40,000
P At the end of the useful life of the asset, the carrying Machinery 220,000 20,000 200,000 8 25,000
amount should equal the residual value (CA = RV) Equipment 130,000 30,000 100,000 4 25,000
1,000,000 100,000 900,000 90,000
4 ILLUSTRATION

The following data relate to an equipment acquired at  Solution:

the beginning of the first year:

Equipment P105,000
Residual Value 5,000
Useful life 5 years
 P 900,000
Composite Life = = 10 years
P 90,000 C. GROUP METHOD

P 90,000 ILLUSTRATION
Composite Rate = = 9%
P 1,000,000
An entity purchased 100 similar machines on January 1, 2014 at a
Annual Depreciation = P1,000,000 x 9% = P90,000 total cost of P1,000,000 or at an average cost of P10,000 per
= P900,000/10 yrs = P90,000 machine

 Journal Entry: The machines have an average useful life of 5 years or an annual
depreciation rate of 20%. The machines are retired as follows:

Depreciation Expense 90,000

Accumulated Depreciation 90,000 DATE No. of machines Salvage proceeds
(P1,000,000 x 9%) or (900,000/10 yrs) Dec 31,2017 30 None
Dec 31, 2018 40 10,000
P Accumulated depreciation is not related to any Dec 31, 2019 30 20,000
100
specific asset account in the group

 Journal Entries:
 Statement Presentation
2014 Depreciation 200,000
Building 650,000 Accumulated Depreciation 200,000
Machinery 220,000 2015 Depreciation 200,000
Equipment 130,000 Accumulated Depreciation 200,000
Total 1,000,000 2016 Depreciation 200,000
Accumulated Depreciation (90,000) Accumulated Depreciation 200,000
Carrying Amount 910,000 2017 Depreciation 200,000
Accumulated Depreciation 200,000
 If the equipment is retired after four years and sold for Accumulated Depreciation 300,000
P20,000, the journal entry is: Machinery 300,000
2018 Depreciation 140,000
Accumulated Depreciation 140,000
Cash 20,000
Accumulated Depreciation 110,000 Cash 10,000
Equipment 130,000 Accumulated Depreciation 390,000
Machinery 400,000

CARRYING AMOUNT-As of 12/31/2018

 If there are no proceeds from the retirement of the
equipment, the journal entry is: Cost (30 machines x P10,000) P300,000
Accumulated Depreciation (250,000)
Accumulated Depreciation 130,000 Carrying Amount 50,000
Equipment 130,000
2019 Depreciation 30,000
Accumulated Depreciation 30,000
P After the retirement of the equipment, the remaining Cash 20,000
cost of the assets in group is: Accumulated Depreciation. 280,000
Machinery 300,000
Cost of the asset = P870,000 (P1,000,000 – P130,000)
Annual depreciation = P78,300 (P870,000 x 9%)
P MAXIMUM DEPRECIATION:
 If the equipment is replaced by a similar asset costing
P160,000
Carrying Amount xx
Cost of the asset = P1,030,000 (P870,000 + P160,000) Salvage Proceeds (Cash proceeds) xx
Annual depreciation = P92,700 (P1,030,000 x 9%) Max. Depreciation xx

P Depreciation shall be discontinued when the same would
result to a carrying amount of the assets in the group
which is below the residual value of the assets in the group
(IF: Below the RV amount of P100,000 = Discontinue
depreciation)
RULE: Depreciation should be limited to the remaining
carrying amount of the asset reduced by salvage
proceeds, if any.
 Carrying Amount 50,000
Salvage proceeds (20,000) A. WORKING HOURS METHOD
Depreciation-2019 30,000
 Solutions
VS.
P 600,000
30 machines left x P10,000 = P300,000 x 20% Rate per hour = = P10
= P60,000
60,000 hrs

Maximum amount of depreciation to be

recorded should be equal to P30,000 only Depreciation Table- Working Hours Method

Yr Depreciation Expense AD CA
600,000
1 14,000 x P10 = P140,000 140,000 460,000
2 13,000 x P10 = P130,000 270,000 330,000
3 10,000 x P10 = P100,000 370,000 230,000
4 11,000 x P10 = P110,000 480,000 120,000
5 12,000 x P10 = P120,000 600,000 -

VARIABLE CHARGE (USE-FACTOR METHODS)

B. OUTPUT OR PRODUCTION METHOD
P Assumes that depreciation is more of a function of use
rather than passage of time P 600,000
Rate per unit = = P4
P Useful life of the asset is considered in terms of the output 150,000hrs
it produces or the number of hours it works
P Depreciation is related to the estimated production
capability of the asset and is expressed in a rate per unit of Depreciation Table- Output Method
output or per hour of use.
P Adopted if the principal cause of depreciation is usage Yr Depreciation Expense AD CA
P The use of this method is based on the ff: 600,000
a. Assets depreciate more rapidly if used full time or 1 34,000 x P4 = P136,000 136,000 464,000
overtime 2 32,000 x P4 = P128,000 264,000 336,000
b. There is a direct relationship between utilization of 3 25,000 x P4 = P100,000 364,000 236,000
assets and realization of revenue 4 29,000 x P4 = P116,000 480,000 120,000
5 30,000 x P4 = P120,000 600,000 -

FORMULAS:
-----------------------------------------------------------------------------------
Rate per hour/unit = DECREASING CHARGE OR ACCELERATED/DIMINISHING
( Cost−Residual Value )∨Depreciable Amount METHODS
Total Est . service hours∨output
P Provides higher depreciation in the earlier years and
lower depreciation in the later years of the useful life
of the asset
ILLUSTRATION P Results in a decreasing depreciation charge over the
useful life
P New assets are generally capable of producing more
Machinery, at cost 600,000 revenue in the earlier years than in the later years
Residual Value None (Considered in the computation) P Another explanation for the use of this method: The
Est useful life: cost of using an asset includes not only depreciation
Years 5 years but also repairs on such assets
Service hours 60,000 hours P Repairs tends to increase with the age of the asset,
Output 150,000 units
repairs are small in earlier years and large during the
later years
Actual operations Service Hours Output
P The overall effect would be a uniform charge
First Year 14,000 34,000
because the decreasing amount of depreciation and
Second Year 13,000 32,000
the increasing repairs will tend to equalize each
Third Year 10,000 25,000
other
Fourth Year 11,000 29,000
Fifth Year 12,000 30,000
60,000 150,000
 A. SUM OF THE YEARS’ DIGIT Solution:

FORMULA: 3+1
SYD = 3 ( )= 6
2
Life+1
SYD = Life ( )
2 From April 1, 2014 to March 31, 2015
(3/6 x P300,000) 150,000
P Include Residual Value in computation
P Carry over the fraction if it’s a calendar From April 1, 2015 to March 31, 2016
period (2/6 x P300,000) 100,000
P Constant Depreciable amount
From April 1, 2016 to March 31, 2017
(1/6 x P300,000) 50,000
 Sum of the half years’ digits
300,000
Useful life of the asset = 2 ½ years
How to get the SYD? Computation of depreciation- CALENDAR PERIOD

P Multiply the useful life by 2 Depreciation 2014:

2½x2=5 P150,000 x 9/12 (April 1, 2014 to Dec 31, 2014) 112,500

Depreciation 2015:
5+1
SYD = 5 ( )= 15 P150,000 x 3/12 (Jan 1 to March 31, 2015) 37,500
2 P100,000 x 9/12 (April 1 to Dec 31, 2015) 75,000
112,500
Depreciation 2016:
P100,000 x 3/12 (Jan 1 to March 31, 2016) 25,000
st
1 year = Two fractions: 5/15 and 4/15 (each fraction P50,000 x 9/12 (April 1 to Dec 31, 2016) 37,500
pertaining to half year or six months) 62,500
2nd year = Two fractions: 3/15 and 2/15 Depreciation 2017:
3rd year = One fraction: 1/15 P50,000 x 3/12 (Jan 1 to March 31, 2017) 12,500

 ILLUSTRATION-SUM OF YEARS’ DIGITS

Machinery 430,000
Residual Value 30,000
Est Useful Life 4 years

Solution:

4 +1
SYD = 4 ( )= 10
2

DEPRECIATION TABLE- SUM OF YEARS’ DIGIT

YR DEP EX AD CA
430,000
1 4/10 x 400k = 160,000 160,000 270,000
2 3/10 x 400k = 120,000 280,000 150,000
3 2/10 x 400k = 80,000 360,000 70,000
4 1/10 x 400k = 40,000 400,000 30,000
400,000

 ILLUSTRATION: FRACTIONAL DEPRECIATION- SUM OF YEARS’

DIGITS

Machinery 300,000
Residual Value None
Est Useful Life 3 years
Date of acquisition April 1, 2014