Land and Building

Technical Knowledge
- To know the proper statement classification of land.
- To identify the costs normally included in land account.
- To know the treatment of issues related to land, such as land improvements, special assessments and real property taxes.
- To identify the costs normally charged to building when purchased and when constructed.
- To know the treatment of issues related to building, such as sidewalks, pavements, parking lot, driveways, ventilating
system, lighting system and elevator.
Land Account and its Classification
Land Nature and Purpose Classification
1. Land used as a plant site PPE
2. Land held for a currently undetermined use Investment Property
3. Land held for capital appreciation Investment Property
4. Land held for current sale by a real estate
developer as in case of subdivided lots Inventory

If the land is held definitely as a future plant site, it is classified as owner-occupied property
and not an investment property and therefore shall be included in PPE.

Costs Chargeable to Land

1. Purchase price
2. Legal fees and other expenditures for establishing clean title
3. Broker or agent commission
4. Escrow fees
5. Fees for registration and transfer of title
6. Cost of relocation or reconstruction of property belonging to others in order to acquire possession
7. Mortgages, encumbrances and interest on such mortgages assumed by buyer
8. Unpaid taxes up to date of acquisition assumed by buyer
9. Cost of survey
10. Payments to tenants to induce them to vacate the land in order to prepare the land for the intended use
but not to make room for the construction of new building
11. Cost of permanent improvements such as cost of clearing, cost of grading, levelling and land fill
12. Cost of option to buy the acquired land. If the land is not acquired, the cost of option is expensed outsight.

Land Improvements
1. Land improvements not subject to depreciation
- Charged to Land Account
a. Cost of surveying
b. Cost of clearing
c. Cost of grading, levelling and landfill
d. Cost of subdividing
e. Other cost of permanent improvement
2. Land improvements subject to depreciation
- Charged to Land Improvement Account
- Depreciated over their useful life
a. Fences
b. Water systems
c. Drainage systems
d. Sidewalks
e. Pavements
f. Cost of trees, shrubs and other landscaping

Special Assessments
- Taxes paid by the landowner as a contribution to the cost of public improvements
- Capitalized as cost of land because it increase the value of the land

Real Property Taxes

- As a rule, real property taxes are treated as outright expense
- However, if unpaid real property taxes are assumed by the buyer in acquiring land, the taxes are capitalized but only up
to the date of acquisition
Building Account

Cost of Building when Purchased

1. Purchased price
2. Legal fees and other expenses incurred in connection with the purchase
3. Unpaid taxes up to date of acquisition
4. Interest, mortgage, liens and other encumbrances on the building assumed by the buyer
5. Payments to tenants to induce them to vacate the building
6. Any renovating or remodeling costs incurred to put a building purchased in a condition
suitable for the intended use such as lighting installation, partitions and repairs

Cost of Building when Constructed

1. Materials used, labor employed and overhead incurred during the construction
2. Building permit or license
3. Architect fee
4. Superintendent fee
5. Cost of excavation
6. Cost of temporary buildings used as construction offices and tools or materials shed
7. Expenditures incurred during the construction period such as interest on construction loans and insurance
8. Expenditures for service equipment and fixtures made a permanent part of the structure
9. Cost of temporary safety fence around construction site and cost of subsequent removal thereof
10. Safety inspection fee
The construction of a permanent fence after the completion of the building is recognized as land improvement.

Sidewalks, Pavements, Parking Lot, Driveways (Charged to Land Improvements or Building)

- If such expenditures are part of the blueprint for the construction of a new building, these are charged to the building
account
- If the expenditures are occasionally made or incurred not in connection with the construction of a new building, these are
charged to land improvements

Claims for Damages

- Where insurance is taken during the construction of building, the cost of insurance is charged to the building because it
is a necessary and a reasonable cost of bringing the building into existence
- Where insurance is not taken, payment for damages should be expensed because the damages represent management
failure or negligence in procuring insurance and are not a reasonable and necessary cost of construction

Building Fixtures (Shelves, Cabinets and Partitions)

- If such expenditures are immovable in the sense that these are attached to the building in such manner that the removal
thereof may destroy the building, these are charged to the building account
- If such expenditures are movable, these are charged to furniture and fixtures and depreciated over their useful life

Ventilating System, Lighting System, Elevator

- If installed during construction, the ventilating system, lighting system and elevator are charged to the building account
- Otherwise, these are changed to building improvements and depreciated over their useful life or remaining life of the
building, whichever is shorter

PIC Interpretation on Land and Building

1. Land and an old building are purchased at a single cost
a. If the old building is usable, the single cost is allocated to land and building based on relative fair value
b. If the old building is unusable, the single cost is allocated to land only

2. The old building is demolished immediately to make room for construction of a new building
a. Any allocated carrying amount of the usable old building is recognized as a loss if the new building is accounted for as
PPE or Investment Property
b. Any allocated carrying amount of the usable old building is capitalized as cost of the new building if the new building
is accounted for as Inventory
c. The demolition cost minus salvage value is capitalized as cost of the new building whether the new building is
accounted for as PPE, Investment Property or Inventory
d. The net demolition cost is capitalized as cost of the land if the old building is demolished to prepare the land for the
intended use but not to make room for the construction of new building
3. A building is acquired and used in a prior period but demolished in the current period to make room for construction of
a new building
a. The carrying amount of the old building is recognized as a loss, whether the new building is PPE, Investment Property
or Inventory
b. The net demolition cost is capitalized as cost of the new building whether the new building is accounted for as PPE,
Investment Property or Inventory
c. If the old building is subject to a contract of lease, any payments to tenants to induce them to vacate the old building
shall be charged to the cost of the new building

Machinery
Capital and Revenue Expenditure

Technical Knowledge
- To identify the costs normally charged to machinery when purchased
- To understand capital expenditure and revenue expenditure
- To know the accounting treatment of capital expenditure and revenue expenditure
- To know the accounting treatment of costs subsequent to acquisition, such as addition, improvements, replacements,
repairs and rearrangement cost

Cost of Machinery when purchased

1. Purchase price
2. Freight, handling storage and other cost related to the acquisition
3. Insurance while in transit
4. Installation cost, including site preparation and assembling
5. Cost of testing and trial run, and other cost necessary in preparing the machinery for its intended use
6. Initial estimate of cost of dismantling and removing the machinery and restoring the site on which it is located, and for
which the entity has a present obligation
7. Fee paid to consultants for advice on the acquisition of the machinery
8. Cost of safety rail and platform surrounding machine
9. Cost of water device to keep machine cool

Notes on purchase of Machinery

- If a machinery is moved to a new location, the undepreciated cost of the old installation cost is expensed and the new
installation cost is charged to the new asset
- If a machinery is removed and retired to make room for the installation of a new one, the removal cost not previously
recognized as a provision is charged to expense
- The value-added tax (VAT) on the purchase of machinery is not capitalizable but charged to input tax to be offset
against output tax
- Any irrecoverable or nonrefundable purchase tax is capitalized as cost of the machinery

Tools
- Tools are classified as machine tools and hand tools. Machine tools include drills and punches. Hand tools include
hammer and saws. Tools should be segregated from the machinery account.

Patterns and Dies

- Patterns and dies are used in designing or forging out a particular product. Patterns and dies used for the regular product
are recorded as assets. Patterns and dies are depreciated over the useful life.
- Patterns and dies used for specifically ordered product form part of the cost of the special product.

Equipment
- Includes delivery equipment, store equipment, office equipment and furniture and fixtures
- The cost of equipment includes the purchase price, freight and other handling charges, insurance while in transit,
installation costs and other costs necessary in preparing them for the intended use.
- Delivery equipment includes cars, trucks and other vehicles used in business operations
- Motor vehicle registration fees should be expensed and not be included as part of the cost of the delivery equipment
- Store and office equipment include computers, typewriters, adding machines, cash register and calculator
- Assets identified with the selling function are classified as store equipment. Otherwise, the assets are charged to office
equipment.
- Furniture and fixtures include showcases, counters, shelves, display fixtures, cabinets, partitions, safes, desks and tables
Returnable Containers
- Returnable containers include bottles, boxes, tanks, drums and barrels which are returned to the seller by the buyer when
the contents are consumed or used
- Containers in big units or of great bulk as in the case of tanks, drums and barrels are classified as PPE
- Containers that are small and individually involve small amount as in the case of bottles and boxes are classified as other
noncurrent assets

Capital Expenditure and Revenue Expenditure

- An expenditure that benefits only the current period is a revenue expenditure and therefore reported as an expense
- An expenditure that benefits the current period and future periods is a capital expenditure and therefore reported as an
asset
Recognition of Subsequent Cost
- Subsequent cost incurred for PPE shall be recognized as an asset when
1. Probable - It is probable that future economic benefits associated with the subsequent cost will flow to the entity
2. Measurable - The subsequent cost can be measured reliably

Future Economic Benefit

- Subsequent cost of PPE will benefit future periods when:
1. The expenditure extends the life of the property
2. The expenditure increases the capacity of the property and quality of output, for example, by upgrading machine parts
3. The expenditure improves the efficiency and safety of the property, for example, by adopting a new production process
leading to large reduction in operating cost

Subsequent Cost on PPE

1. Additions
2. Improvements or Betterments
3. Replacements
4. Repairs
5. Rearrangement Cost

Additions
- Modifications or alterations which increase the physical size or capacity of the asset
- Expenditures of such are of two types:
1. An entirely new unit
- Construction of a new building
- Depreciated over the useful life
2. An expansion, enlargement or extension of the old asset
- Addition of a wing to a building or the construction of a third storey on a two-storey building
- Depreciated over the life of the expansion or remaining useful life of the asset of which it is part, whichever is shorter

Improvements or Betterments
- Modifications or alterations which increase the service life or the capacity of the asset
- May represent replacement of an asset or part thereof with one of a better or superior quality
- Normally capitalized
- Improvements that do not involve replacement of parts are simply added to the cost of the existing asset
1. A tile roof is substituted for wooden shingles
2. A shatter proof glass is substituted for ordinary glass
3. An old motor in a machine is replaced by a new and powerful one
4. Galvanized iron roofing is substituted for nipa roofing
5. Replacement of wooden floor by concrete flooring

Replacements
- Substitution (equal or lesser quality) but the new asset is not better than the old asset
1. Replacement of the old asset by a new one
2. Replacements of major parts or extraordinary repairs
3. Replacements of minor parts or ordinary repairs
Repairs
- Expenditures used to restore assets to goods operating condition upon their breakdown or replacement of broken parts
1. Extraordinary Repairs
- Material replacement of parts, involving large sums and normally extends the useful life of the asset
- Usually capitalized as PPE
2. Ordinary Repairs
- Minor replacement of parts, involving small sums and are frequently encountered
- Normally charged to expense when incurred
- An entity does not include in the carrying amount of PPE the cost of day-to-day servicing of the property

Repair and Maintenance

- Repair restores the asset in good operating condition while maintenance keeps the asset in good condition. Repair is
restorative or curative while maintenance is preventive.

Rearrangement Cost
- The relocation or reinstallation of an asset which proves to be less efficient in its original location
- Rearrangement normally increases the future service potential of the asset and therefore the cost is capitalized
- If the rearrangement merely maintains the existing level of performance of the asset, the cost is expensed

Accounting for Major Replacement

1. Separate Identification Applicable
- The major replacement is debited to the asset account
- The cost of the part eliminated and the related accumulated depreciation are removed from the accounts and the
remaining carrying amount of the old part is treated as a loss

2. Separate Identification Not Applicable

- If it is not practicable for an entity to determine the carrying amount of the replaced part, it may use the cost of the
replacement as an indication of the “likely original cost” of the replaced part at the time it was acquired or constructed
- The current replacement cost shall be discounted