University of Southern Philippines Foundation

College of Accountancy

Intermediate Accounting 1

Module.16_Financial Reporting of Property, Plant and Equipment (Part 2) – Depreciation and Derecognition

Introduction

This module focuses on the computation of depreciation of property, plant and equipment in accordance with Philippine Accounting
Standards16 Property, Plant and Equipment. This module is the second part of three module lecture for Property, Plant and Equipment
which focuses on the subsequent measurement. It introduces the learner to the properly compute depreciation of property, plant and
equipment through the online lecture, develops the learner’s understanding of the requirements through the use of examples and
indicates significant judgements that are required in accounting for property, plant and equipment. Furthermore, the module includes
questions designed to test the learner’s knowledge of the requirements and to develop the learner’s ability to account for property,
plant and equipment in accordance with PAS 16.

Learning Outcomes

At the end of this module you MUST be able to:

1. Compute depreciation expense and carrying amount of Property, Plant and Equipment using different method.
2. Calculate gain or loss on derecognition of Property, Plant and Equipment

Learning Activities:

1. Submission of assignment through Canvas.

2. Read lecture notes.
3. Answer pre-assessment activities through Canvas.
4. Download the pre-recorded lecture.

Lecture Notes

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

Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.

The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting
the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.

Useful life is:

(a) the period over which an asset is expected to be available for use by an entity; or

(b) the number of production or similar units expected to be obtained from the asset by an entity.

Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be
depreciated separately.

The depreciable amount should be allocated on a systematic basis over the asset's useful life.

The residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations differ from
previous estimates, any change is accounted for prospectively as a change in estimate under PAS 8.
The depreciation method used should reflect the pattern in which the asset's economic benefits are consumed by the enterprise.

The depreciation method should be reviewed at least annually and, if the pattern of consumption of benefits has changed, the
depreciation method should be changed prospectively as a change in estimate under PAS 8.

Depreciation should be charged to the income statement, unless it is included in the carrying amount of another asset.

Depreciation begins when the asset is available for use and continues until the asset is derecognized, even if it is idle.
SUMMARY OF DEPRECIATION METHODS

I. Uniform/Equal
Straight line
Depreciable Amount (DA)/useful life
Or DA x Depreciation rate (DR)
DR = 1/useful life

Group/Composite
Cost or balance x DR
DR = annual dep/total cost

II. Activity
Output/Production
Output x Depreciation rate
DR = DA/total est. output

Working hours
Hours used x Depreciation rate
DR = DA/total est. hours

III. Accelerated/Diminishing
Sum of the years digits (SYD)

DA x Fraction
SYD = [(life+1)/2] x life

Declining

Previous CA x Depreciation rate

Regular = 1 – [nth root of (RV/Cost)]

150% = (1/UL) x 1.5
200% = (1/UL) x 2

IV. Other Methods

Retirement
Cost of assets retired – Proceeds from retirement

Replacement
Replacement cost of assets retired – Proceeds from retirement

Inventory
Recorded balance of assets – Value at period end

Derecognition (Retirements and Disposals)

An asset should be removed from the balance sheet on disposal or when it is withdrawn from use and no future economic benefits are
expected from its disposal. The gain or loss on disposal is the difference between the proceeds and the carrying amount and should be
recognized in the income statement.

-- end of lecture notes --

Pre-Assessment Activity on Property, Plant, and Equipment – Depreciation and Subsequent Expenditure

1. The Shemay Company purchased an office equipment with a useful life of 10 years on 1 January 2019 for P6,500,000. At its year end of 31
December 2019, the amount the company would receive from the disposal of the asset if it was already of the age and in the condition expected at
the end of its useful life was estimated at P700,000. Inclusive of inflation the actual amount expected to be received on disposal was estimated at
P900,000. What should be the depreciation charge for the year ended 31 December 2019?

Cost 6,500,000
Residual Value 700,000
Depreciable amount 5,800,000
Useful life 10
 Depreciation Expense 580,000

2. On January 1, 2017, Happiness Company signed a 12-year lease for a building. Happiness has an option to renew the lease for an additional 8-
year period on or before January 1, 2021. During January 2019, Happiness made substantial improvements to the building. The cost of the
improvements was P3,600,000, with an estimated useful life of 15 years. At December 31, 2019, Happiness intended to exercise the renewal
option. Happiness has taken a full year’s amortization on this improvement. What should be the depreciation charge for the year ended 31
December 2019?

LEASEHOLD IMPROVEMENT
Term (shorter)
- Estimated Useful Life
- Lease term

Renewal Option
- to be Exercised - consider
- not - ignore

SHORT
USEFUL LIFE 15 years ER

LEASE TERM 10 years

Renewal option (considered) 8 years
18 years

Cost 3,600,000
Useful life 15
Depreciation 240,000

Alternative: (renewal option not exercised)

USEFUL LIFE 15 years

LEASE TERM 10 years

Renewal option (not considered) 0 years
SHORT
10 years ER

COST 3,600,000
Useful life 10
Depreciation 360,000

3. Lovely, Inc., a small furniture manufacturer, purchased the following assets at the end of 2019.
Asset # Cost R,V. D.A. Life
1 P24,000 P5,000 P19,000 5 years
2 900 130 770 7 years
3 320 - 320 8 years
4 9,000 500 8,500 5 years
P34,220 P5,630 P28,590
The group depreciation rate is

Depreciation
Depreciation Rate =
Cost

5,650
Depreciation Rate =
34,220

Depreciation Rate = 16.51%

Depreciation Expense = Total cost * Dep. Rate

Depreciation Expense = 34,220 * 16.51%
Depreciation Expense = 5,649.72

Depreciable amount
Composite Life =
Annual Depreciation

28,590
Composite Life =
5,650

Composite Life = 5.06 years

4. Joyful, Inc., uses the group depreciation method for its furniture account. The depreciation rate used for furniture is 21%. The balance in the
furniture account on December 31, 2018, was P125,000, and the balance in Accumulated Depreciation - Furniture was P61,000. The following
purchases and dispositions of furniture occurred in 2019 (assume that all purchases and disposals occurred at the beginning of each
year).
Assets Sold
 Assets Purchased Cost Selling Price
P35,000 P27,000 P8,000
The carrying amount of furniture at December 31, 2019 is

entries:
(purchase)
Furniture 35,000
Cash 35,000

Cash 8,000
Accum. Depreciation 19,000
Furniture 27,000

Cost (125000+35000-27000) 133,000

LESS: Accumulated Depreciation
Beg 61,000
Depreciation (133T*.21) 27,930
Disposal (19,000) 69,930
Carrying Amount 63,070

5. Marga Corporation acquired a machine at a total cost of P5,200,000. The estimated life of the machine is 8 years or a total of 100,000 working
hours with no salvage value. The operating hours of the machine totaled: 2018, 5,000 hours; 2019, 12,000 hours. The company follows the
working hours method of depreciation. On December 31, 2019, the carrying amount of the machine is

Cost 5,200,000
Total Working Hours 100,000
Dep/ Hour 52

Cost 5,200,000
AD (17000*52) 884,000
Carrying amount 4,316,000

Dep. Exp. - 2018 (5,000 * 52) 260,000

Dep. Exp. - 2019 (12,000*52) 624,000
Total Accum. Dep as of 2019 884,000

6. The Kazy Company purchased a machine on 1 January 2018 for P81,000. The useful life of the machine is estimated at 3 years with a residual value
at the end of this period of P6,000. During its useful life, the expected units of production from the machine are:
2018 12,000 units
2019 7,000 units
2020 5,000 units
What should be the depreciation expense for the year ended 31 December 2019, using the most appropriate depreciation method permitted by PAS16
Property, plant and equipment?

Cost 81,000
Residual Value 6,000
Depreciable amount 75,000
Estimated output 24,000
DR/Output 3.125
Output 7,000
DEPRECIATION- 2019 21,875

Cost 81,000
Accum. Dep. (19000*3.125) 59,375
CA 12/31/19 21,625

7. Rome Mina Corp. uses the sum-of-the-years’ digits method to depreciate equipment purchased in January 2017 for P20,000. The estimated
residual value of the equipment is P2,000 and the estimated useful life is four years. What should be the depreciation charge for the year ended
December 31, 2019?

Cost 20,000
Residual Value 2,000
Dep. Amount 18,000
FRACTION 2/10
Depreciation- 2019 3,600

2017 4/10 7,200

2018 3/10 5,400
2019 2/10 3,600
Acc. Dep 12.31.19 16,200

Cost 20,000
AD (18000*9/10) 16,200
CA 12.31.19 3,800
8. Dun Yeila Company purchased a machine in January 2, 2016, for P500,000. The machine has an estimated useful life of eight years and a
salvage value of P50,000. Depreciation was computed by the 200% declining-balance method. What should be the depreciation charge for the
year ended 31 December 2019?

Cost 1/1/16 500,000

Dep- 2016 (500000*.25) 125,000
CA 12/31/16 375,000
Dep-2017 (375000*.25) 93,750
CA 12/31/17 281,250
Dep -2018 (281250*.25) 70,312
CA 12/31/18 210,938
x Dep. Rate 0.25
Dep – 2019 52,735

CA 12/31/18
(500000*.75*.75*.75) 210,938
x Dep. Rate 0.25
Depreciation – 2019 52,735

9. Kuya Jei Foy Company uses hand tools in its manufacturing activities. On January 1, 2019, there are 800 of such tools on hand at a cost of
P200 each. Acquisition and retirement in the year 2019 are:
Estimated value
Acquisition Retirement at year end
400 @ P300 300 @ P50 P200,000
Assuming that retirements are on a first-in, first-out basis, which of the following statements is true?
a. The depreciation using the retirement method is P60,000.
b. The depreciation using the replacement method is P90,000.
c. The depreciation using the inventory method is P75,000.
d. The retirement method yields the lowest amount of depreciation compared to replacement and inventory methods.

Retirement method
Cost (300*200) 60,000
Proceeds (300*50) (15,000)
Depreciation 45,000

Replacement method
Replacement cost (300*300) 90,000
Proceeds (300*50) (15,000)
Depreciation 75,000

Inventory method
Bal 1/1 (800*200) 160,000
Purchases (400*300) 120,000
Retirement (300*50) (15,000)
Balance 265,000
Per physical count 200,000
Depreciation 65,000

10. Roses Company takes a full year’s depreciation in the year of an assets acquisition, and no depreciation in the year of disposition. Data relating
to one depreciable asset acquired in 2017, with residual value of P900,000 and estimated useful life of 8 years, at December 31, 2018 are:
Cost P9,900,000
Accumulated depreciation 3,750,000
Using the same depreciation method in 2017 and 2018, how much depreciation should Roses record in 2019 for this asset?

Straightline Method
Cost 9,900,000
Residual Value 900,000
Depreciable amount 9,000,000
Useful life 8
Depreciation Expense 1,125,000
x no. of years 2
Acc. Dep (straight line) 2,250,000

Sum of years' digit

Cost 9,900,000
Residual Value 900,000
 Depreciable amount 9,000,000
x Fraction (15/36) 15/36
Acc. Dep 12.31.19 3,750,000

DA 9,000,000
fraction (6/36) 6/36
Depreciation 1,500,000

2017 8/36
2018 7/36
2019 6/36

Cost 9,900,000
AD 12.31.19 (9M * 21/36) 5,250,000
CA 12.31.19 4,650,000

11. Baby Co. purchased equipment for P500,000. The equipment had an estimated 10-year service life. Baby’s policy for 10-year assets is to use
the 150% declining balance depreciation method for the first five years of the asset’s life and then switch to the straight-line depreciation
method. What amount should Baby report as accumulated depreciation for equipment at the end of the sixth year?

Cost 500,000
Acc. Dep. 278,147
CA – end 5 yr (500,000*.85^5) 221,853
Useful life 5
Depreciation - 6th yr 44,371

AD (Y1-Y5) 278,147
Dep - Y6 44,371
Acc. Dep. - End of y6 322,518

12. Entity A acquired an asset that had a cost of P130,000. The asset is being depreciated over a 5-year period using the sum-of-the-years’ digit
method. It has a salvage value estimated at P10,000. The loss/gain if the asset is sold for P38,000 at the end of the third year is

Proceeds 38,000
Less: Carrying amount
Cost 130,000
AD (120000*12/15) 96,000 34,000
Gain 4,000

y1 5/15
y2 4/15
y3 3/15

Use the following information for the next two questions.

Riles Truckers, Inc. acquired a heavy road transporter on January 1, 2013 at a cost of P10 million. The estimated useful life is 10 years. On January
1, 2019, the power train requires replacement, as further maintenance is uneconomical due to the off-road time required. The remainder of the
vehicle is perfectly roadworthy and is expected to last for the next four years. The cost of the new power train is P4.5 million.
13. Assuming that the original cost of the power train is P3 million, the total depreciation expense in 2019 is

Original cost 10,000,000

Old (3,000,000)
New 4,500,000
Cost 11,500,000
AD (7000000*6/10) 4,200,000
Rem. DA 7,300,000
/ Remaining Life 4
Dep expense 1,825,000

Alternative:
old 7M/10 700,000
new 4.5M/4 1,125,000
Dep expense 1,825,000

AD (3M*6/10) 1,800,000
Loss on derecognition 1,200,000
Transport Equipment 3,000,000

Transport Equipment 4,500,000

Cash 4,500,000
14. Assuming that the original cost of the power train is not separately identifiable and the appropriate discount rate is 5% (the present value of 1 at
5% for 6 years is 0.7462), the total depreciation expense in 2019 is

Original cost 10,000,000

Old (4,500,000*.7462) (3,357,900)
New 4,500,000
Cost 11,142,100
AD (10M-3357900*6/10) 3,985,260
Rem. DA 7,156,840
/ Remaining Life 4
Dep expense 1,789,210

Alternative:
Old (10000000-3357900)/10 664,210
New (4500000/4) 1,125,000
1,789,210

AD (3,357,900*6/10) 2,014,740
Loss on derecognition 1,343,160
Transport Equip 3,357,900

Transport Equipment 4,500,000

Cash 4,500,000

15. Bugis Corp. acquired a machine on January 1, 2011. Details of the machine at December 31, 2018 are given below:
Depreciation basis
Component Cost
Engine P170,000,000 Useful life of
40,000 hours
Outer casings 510,000,000 25 years straight line
Other components 255,000,000 12 years straight line
P765,000,000
During the year 2019, the following events took place:
a) Engine, which had run for 30,000 hours till date developed serious snags. It was replaced by a better engine with a cost of P238 million
and estimated life of 50,000 hours. The new engine was used for 5,000 hours during the year.
b) Polishing and painting was done to the outer casings at a cost of P1.3 million.
c) Other components were upgraded at a cost of P102 million. The remaining life of the other components is 5 years.
Compute the total depreciation for the year 2019, assume that all the work mentioned above was completed at the beginning of 2019.

New engine (238M/50T*5000) 23,800,000

Outer casing 20,400,000
Other Component
CA (255M * 4/12) 85,000,000
Upgrade 102,000,000
Rem Dep. Amount 187,000,000
Revised Rem. Useful Life 5 37,400,000
Total Depreciation 81,600,000

-- end of Pre-Assessment Activity --

Assessment

1. Online quiz through Canvas.

Optional Activities/Resources

1. Intermediate Accounting 1B 2019 Edition by Zeus Vernon B. Millan

2. https://www.iasplus.com/en/standards/ias/ias16
3. https://youtu.be/VgP1kakxmB4

SMC 😊