Land, Building & Equipment

Rizalina B. Ong 1
Purchase price
Legal fees and other expenditures
for establishing clean title
Cost of relocation or reconstruction of
property belonging to others to acquire
possession
Mortgage, encumbrance, and interest
assumed by the buyer
Cost of option to buy acquired land
If land is not acquired, cost option is
expensed outright.
Rizalina B. Ong
Broker or agent commission
Escrow fees
Fees for registration and transfer of title
Cost of survey
Special assessment taxes paid by landowner
Unpaid real property taxes assumed by the buyer
Payments to tenants for them to vacate the land
Cost of permanent improvements
(cost of clearing, grading, leveling and landfill)
2
a. Purchase price
b. Legal fees and other expenses incurred in connection
with the purchase
c. Unpaid real property taxes up to date of acquisition
d. Interest, mortgages, liens and other encumbrances on
the building assumed by the buyer
e. Payments to tenants to vacate the building
f. Any renovating or remodeling costs to put the building
purchased in a condition suitable for the intended use
such as lighting installations, partitions, and repairs.

Rizalina B. Ong 3
a. Materials used, labor,a nd overhead incurred during construction
b. Building permit or license
c. Architect fee
d. Superintendent fee
e. Cost of excavation
f. Cost of temporary buildings used as construction office
and tools or materials shed
g. Expenditures incurred during construction period such
as interest on construction loans and insurance
h. Expenditures for service equipment and fixtures made
a permanent part of the structure
i. Cost of temporary safety fence around the construction site
and cost of subsequent removal
j. Safety inspection fee
Rizalina B. Ong 4
• Land improvements not subject to depreciation are charged to
land account. Examples: cost of surveying, cost of clearing, cost
of grading, leveling and landfill, and cost of subdividing.
• Depreciable land improvements are charged to land
improvements. Examples: fences, water systems, drainage
systems, sidewalks, pavements and cost of trees, shrubs and
other landscaping.

Rizalina B. Ong 5
Sidewalks, Pavements, Parking lot, Driveways

• If part of blueprint for construction of new building,

charged to building account.
• If not in connection with the construction of new building,
charged to land improvements.

Rizalina B. Ong 6
Claims for Damages

• If taken during construction of the building, charged to

building account.
• If no insurance was taken, any payment for damages or
injuries sustained during construction is expensed.

Rizalina B. Ong 7
 Ventilating Systems, Lighting
Building Fixtures Systems, Elevator

• Immovable shelves, cabinets, • Installed during construction -

and partitions are charged to charged to building account
building account • If not installed during
• Movable - charged to construction - charged to
furniture and fixtures building improvements

Rizalina B. Ong 8
PIC Interpretation on Land and Building
1. Land and an old building are purchased at a single cost:
a. If building is , allocate the single cost based on .
b. If 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 CA of the usable old building is recognized as a loss if the new
building is accounted for as PPE or IP.
b. any allocated CA of the usable old building is capitalized as cost of the new
building if the new building is accounted for as inventory.
c. Capitalized cost of the new building = demolition cost - salvage value
d. 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
construction of new building.
Rizalina B. Ong 9
PIC Interpretation on Land and 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 CA of the old building is recognized as a loss, whether the new
building is PPE, IP, or inventory.
b. The net demolition cost is capitalized as cost of the new building
whether the new building is accounted for as PPE, IP, 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.

Rizalina B. Ong 10
JKL Company purchased a P4,800,000 tract of land as a factory site. The
entity razed an old building on the property and sold the materials it
salvaged from the demolition.
demolition of old building 240,000
legal fees for purchase contract and recording title 180,000
title guarantee insurance 60,000
proceeds from sale of salvaged materials 24,000

What amount should be reported as cost of the land?

Rizalina B. Ong 11
• Answer problem 26-13 and 26-14 on page 697 and 698,
respectively.

Rizalina B. Ong 12
a. Purchase price
b. Freight, handling, storage, and other cost related to the acquisition
c. Insurance while in transit
d. Installation cost, including site preparation and assembling
e. Cost of testing and trial run, and other cost necessary in preparing the machinery
for its intended use
f. 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
as required by law or contract.
g. Fee paid to consultants for advice on the acquisition of the machinery
h. Cost of safety rail and platform surrounding machine
i. Cost of water device to keep machine cool
j. Cost of adjustment changes to the machine prior to use to make it operate more
efficiently
Rizalina B. Ong 13
• If 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 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.

Rizalina B. Ong 14
• Machine tools include drills and punches. Hand tools include hammer
and saws. Tools are segregated from machinery account.
• Patterns and dies are used in designing or forging out a particular
product; depreciated ove the useful life. Patterns and dies used for
specifically orderred product form part of the cost of the special product.
• Equipment includes delivery equipment, office equipment, store
equipment, and furniture and fixtures.
• Returnable containers in big units or great bulk (tanks, drums, barrels)
are classified as PPE. Containers that are small and individually involve
small amount (bottles and boxes) are classified as noncurrent assets
• If containers are , charged to
Rizalina B. Ong 15
The cost should include all materials used and labor
directly traceable to the construction as well as
indirect costs such as interest, utilities, and
supervision.

Rizalina B. Ong 16
• Revenue expenditure - benefits only the current period;
reported as expense
• Capital expenditure - benefits the current period and
future periods; reported as an asset
• Subsequent measurement: if subsequent cost will
increase the future service potential of the asset, the cost
is capitalized.
• If it merely maintains the existing level of standard
performance, the cost should be expensed.
Rizalina B. Ong 17
How to determine if the subsequent cost of an item of PPE benefits
future periods or increases the service potential of an asset:
a. The expenditure extends the life of the property
b. The expenditure increases the capacity of the property and quality
of output
c. The expenditure improves the efficiency and safety of the PPE

Rizalina B. Ong 18
1. additions
2. improvements or betterments
3. replacements
4. repairs
5. rearrangement cost

Rizalina B. Ong 19
• Additions are modifications or alterations which increase the
physical size or capacity of the asset.
• Types of additions:(both are capitalized)
a. an entirely new unit [depreciated over useful life]
b. an expansion or extension of the old asset [depreciated over
the useful life of the expansion or the remaining useful life,
whichever is shorter]

Rizalina B. Ong 20
• Improvements or betterments are enhancements that become permanent
part of the property and increase the service life and value of the property or
capacity of the asset; hence, capitalized.
involve substitution but the new asset is NOT better than the
old asset when acquired.
• Improvement is a substitution of a better or superior quality while
is a substitution of an equal or lesser quality.
• Kinds of Replacement:
1. old asset by a new asset (capitalizable)
2. replacement of major parts (extraordinary repairs, hence
capitalizable)
3. minor parts or ordinary repairs (expense when incurred)
Rizalina B. Ong 21
• Rearrangement cost is the relocation or redeployment of an existing
PPE. Not capitalizable
• Accounting for major replacement:
* If original part can be separated, major replacement is debited to
asset account. The cost of eliminated part and its related AD are removed
from the accounts and the remaining CA of the old part is treated as a
loss.
* If the CA of replaced part cannot be determined, it may use the cost
of the replacement as an indication of the “likely original cost” of the
replaced part. The current replacement cost shall be discounted.

Rizalina B. Ong 22
• A major improvement NOT involving replacement of part and does not
extend the useful life of the asset is debited to the asset account.
• Major improvement that extends the useful life of the asset may be
debited to AD.

Rizalina B. Ong 23
• Refer to problem 27-8 and 27-9 on page 714 and 715,
respectively

Rizalina B. Ong 24
• Answer problem 27-1 on page 711, 27-16 on page 718
and 27-18 on page 719

Rizalina B. Ong 25