01

PROPERTY,
PLANT AND
EQUIPMENT
(PART 1 INITIAL MEASUREMENT)
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1
Introduction and Scope
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DEFINITION
Tangible Used in normal Long-term in
With physical substance
operations nature
Used in the production or supply of Expected to be used for
goods or services, for rentals, or for more than a year
administrative purposes
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PAS 16
EXAMPLES OF PPE:
a. Land used in business
b. Land held for future plant site
c. Building used in business
d. Equipment used in the production of goods
e. Equipment held for environmental and safety reasons
f. Equipment held for rentals
g. Major spare parts and long-lived stand-by equipment
h. Furniture and fixture
i. Bearer plants
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PAS 16
DOES NOT APPLY TO:
a. Classified as held for sale (PFRS 5)
b. Land held by undetermined use or for capital appreciation (PAS 40
Investment Property)
c. Biological assets, other than bearer plants (PAS 41)
d. Exploration and evaluation assets (PFRS 6)
e. Mineral rights and reserves
f. Land by real estate developer and held for sale in the normal course
of business (PAS 2)
g. Intangible Assets
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PAS 16
CLASSES OF PPE:
a.Land
b.Land and buildings
c.Machinery
d.Ships
e.Aircraft
f.Motor vehicles
g.Furniture and fixtures
h.Office equipment
i. Bearer plants
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RECOGNITION and DERECOGNITION

The cost of an item of property, plant, and equipment shall be
recognized as an asset only if:
• It is probable that future economic benefits associated with
the item will flow to the entity; and
• the cost of the item can be measured reliably

The carrying amount of an item of property, plant,

and equipment shall be derecognized:
• On disposal; or
• When no future economic benefits are expected
from its use or disposal
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2
Measurement
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INITIAL MEASUREMENT:
AT COST
PURCHASE PRICE DIRECT COSTS COSTS OF
• Invoice Price costs necessary to bring the asset to DISMANTLING
• Import Duties the location and condition intended
• Dismantling and removing the item and
Non-refundable purchase taxes by management
• restoring the site on which it is located
Minus trade discounts and rebates
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Cessation of Capitalization of costs

When PPE is in the location and condition necessary for it be
capable of operating in the manner intended by management.
Therefore, costs incurred in using or redeploying a PPE are not
capitalized.
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Costs that are EXPENSED immediately

N- New Product
O- Opening of new facility
N- New Location
L- Less than full capacity
I- Initial operating losses
A- Administrative & General Overhead costs
R- Restructuring or reorganization costs
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ILLUSTRATION 1:
ABC Co. acquired a factory equipment overseas on a cash basis for ₱100,000.
Additional costs incurred include the following: commissions paid to brokers for the
purchase of the equipment, ₱5,000; import duties of ₱25,000; value-added taxes of
₱10,000; freight cost of transferring the equipment to ABC Co.’s premises, ₱1,000;
costs of assembling and installing the equipment, ₱2,000; costs of testing the
equipment, ₱1,500; and administration and other general overhead costs, ₱4,200; and
advertisement and promotion costs of the new product to be produced by the
equipment, ₱3,800. The samples generated from testing the equipment were sold at
₱500.

Requirement: Compute for the initial cost of the equipment.

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ILLUSTRATION 1:
Purchase Price P
100,000
Commissions to Brokers 5,000
Import Duties
25,000
Transportation Costs
1,000
Assembling and Installation Costs 2,000
Testing Costs
1,500
Net proceeds from sample generated (500)
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3
Special Cases of Acquisition
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• DEFERRED SETTLEMENT
• Cash price equivalent (or present value of deferred payments)
• Any difference from total amount paid recognized as interest expense
• If short term, invoice price less discount, whether taken or not
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ILLUSTRATION 2:
On September 1, 2018, Bane Corporation purchased a new machine on a deferred
payment basis. A down payment of P20,000 was made and 4 annual installments of
P60,000 each are to be made beginning on September 1, 2018. The cash equivalent
price of the machine was P230,000. Due to an employee strike, Bane could not install
the machine immediately, and thus incurred P3,000 of storage costs. Costs of
installation (excluding the storage costs) amounted to P8,000.

What is the amount to be capialized as the cost of the machine?

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ILLUSTRATION 2:
Cash price equivalent P230,000
Installation cost 8,000
Initial cost P238,000

*Storage costs are not necessary to bring the asset to its intended location and condition.

Journal Entry:
Equipment 238,000
Cash 20,000
Accounts Payable 218,000
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2A. ISSUANCE OF BONDS

HIERARCHY:
a. Fair Value (or present value) of the bonds issues
b. Fair Value of asset received
c. Face Value of the bonds issues
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2B. ISSUANCE OF SHARES

HIERARCHY:
a. Fair Value of asset received
b. Fair Value of shares issues
c. Par Value or Stated Value of shares issues
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ILLUSTRATION 3:
On October 1, 2019, Harith Corporation purchases an industrial building by an issue
of 5,000,000 ordinary shares of P1 par each to the vendor. Harith Corporation’s shares
have been actively traded on the stock exchange, but its quoted price has been erratic
ranging from a low of P3.50 to a high of P13.50 for the year. On the date of purchase
of the building, Harith Corporation’s shares are quoted at P8.80. The company paid
P220,000 transfer and legal cost in relation to the building. At the time of acquisition,
the industrial building has a fair value of P35,000,000 on the existing use basis.

At what amount should the building be initially recorded?

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ILLUSTRATION 3:
Fair value of building P35,000,000
Transfer and legal cost 220,000
Initial cost P35,220,000
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ILLUSTRATION 4:
Meredith bought a delivery car worth P500,000. A down-payment of P100,000 was
paid and the balance is payable in two equal annual installments through a non-interest
bearing note. The imputed rate was 12%. Prepare Journal Entry.

P100,000 Cash
P400,000 Payable ; PVoa= 200,000 x *insert*

Vehicle P 438,010
Discount on Notes Payable 61,990
Cash 100,000
Note Payable 400,000
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3. EXCHANGE OF ASSETS
IF WITH COMMERCIAL SUBSTANCE:
a. Fair Value of asset given up (plus cash paid/ minus cash
received)
b. Fair Value of asset received (plus cash paid/ minus cash
received)
c. Book value of asset given up (plus cash paid/ minus cash
received)

LACKS COMMERCIAL SUBSTANCE:

a. Book Value of asset given up
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ILLUSTRATION 5:
A brand-new set of monobloc chairs in exchange for used chairs which originally cost
P300,000 and was 50% depreciated. Additional cash of P50,000 was paid. The fair
value of the old chairs was determined to be P180,000, while the fair value of the new
chairs is P250,000. The exchange has commercial substance.

How much is the initial cost of the new chairs? Prepare Journal Entries.
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ILLUSTRATION 5:
Fair value of asset given up P180,000
Cash paid 50,000
Initial cost P230,000

Journal Entry:
Chairs- new P 230,000
Accumulated Depreciation 150,000
Chairs- old 300,000
Cash 50,000
Gain on exchange 30,000
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4. DONATED ASSET
• If from a shareholder, at fair value of the asset received to be recorded as
“Donated Capital”, any additional cost is deducted from share premium

• If from a non-shareholder, at fair value of the asset received plus directly

attributable costs, recorded as “Income from Donations”
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ILLUSTRATION 6:
A cabinet was donated by a shareholder. The cabinet has an appraised value of
P50,000. Delivery and handling costs amounts to P1,500 to bring the cabinet to the
company’s premises.

How much is the initial cost of the asset? Prepare Journal Entries.
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ILLUSTRATION 6:
Fair value of asset P50,000
Initial cost P50,000

*Delivery and handling costs will be recorded as a deduction from share premium

Journal Entry:
Equipment P 50,000
Donated Capital 50,000
Share Premium 1,500
Cash 1,500
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5. SELF-CONSTRUCTED ASSET
• Direct costs of materials
• Direct costs of labor
• Indirect costs (i.e. overheads, indirect materials, indirect labor)
• Normal wastes and capitalizable borrowing costs shall be included as part of
the cost of the asset. However, abnormal wastes and any initial operating
losses or profits that arise during construction shall be excluded from the
capitalizable cost of the item of PPE.
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6. Lump-sum
The acquisition cost of a group of items of PPE acquired on a lump-sum price
(basket price) is allocated to the individual assets based on their relative fair
values at the date of purchase.
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4
LAND AND BUILDING
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LAND
Land is classified as PPE if it is used in the entity’s operations as “owner
occupied” property, e.g., land on which the entity’s office building was
constructed and land used as plant site. Land held for future plant site is also
classified as PPE.
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LAND IMPROVEMENT
Land improvements are enhancements to the land which have definite useful
life, such as private driveways, walks, fences, drainages and water systems, cost
of trees and shrubs and other landscaping.

Land normally has an indefinite useful life, thus, it is not subject to depreciation.
Therefore, land improvements are segregated from the cost of land and
depreciated over their estimated useful lives.
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COST OF LAND
The following costs shall be included as part of the "Land" account:

a.Purchase price
b.Legal fees and other expenditures to acquire clean title
c.Broker's commission
d.Escrow fees
e.Fees for registration and title transfer
f.Cost of relocation or reconstruction of property belongings to others in order to acquire
possession
g.Mortgages, encumbrances and interest on such mortgages assumed by the buyer
h.Unpaid property taxes assumed up to date of acquisition. Taxes accruing after the
acquisition is expensed.
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COST OF LAND
The following costs shall be included as part of the "Land" account:

i.Cost of surveying
j.Cost of demolishing unwanted old structures, less proceeds from sale of salvage materials.
k.Payment to tenants to induce them to vacate land (or costs of relocating squatters)
l.Cost of non-depreciable, permanent improvements such as grading, levelling, subdividing
and landfill.
m.Cost of option to buy the acquired land. However, if the land is not acquired, the cost of
option is expensed
n.Special assessments
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BUILDING
Building is classified as PPE if it is used in the entity’s operations as “owner
occupied property”, e.g., building used to sell goods or services and building used
for administrative purposes. Building being constructed or developed for future
use as “owner occupied” property is also classified as PPE.
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BUILDING IMPROVEMENT
Building improvements refer to costs incurred subsequent to occupancy of a purchased
building or subsequent to completion of a self-constructed building that either increase
the useful life of the building or improve its current state.

This includes:
1. Cost of elevator, escalator, or similar items that was not originally included in the
purchased building or in the blueprint of a self-constructed building.
2. Ventilation systems, plumbing, and lighting systems installed after occupancy of a
purchased building or after completion of a self-constructed building. However, if
they are installed prior to occupancy or during construction, they are capitalized to the
building account.
3. Immovable fixtures attached to the building which, if removed, would necessarily
damage the building, e.g., partitions, compartments and cranes. Movable fixtures are
classified as furniture and fixtures, e.g., signage.
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COST OF BUILDING
The following costs shall be included as part of the "Building" account:

If purchased:
a.Purchase price
b.Legal fees
c.Unpaid taxes up to date of acquisition. Taxes accruing after the acquisition is expensed.
d.Interest, mortgages, liens and encumbrances on the building assumed by the buyer.
e.Payments to tenants to induce vacation from the existing building
f.Any renovation or remodeling costs incurred to put the building in its necessary
condition (e.g. lighting installations, partitions and major repairs)
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COST OF BUILDING
The following costs shall be included as part of the "Building" account:

If self-constructed:
a.Materials, labor and overhead incurred
b.Building permit and licenses
c.Professional fees, such as architect fees, safety inspector fees and superintended fees
d.Cost of excavation to layout foundation.
e.Cost of temporary building used as construction offices and storage for tools and materials to be used.
f.Interest on construction loans and insurance (PAS 23)
g.Expenditures for service equipment and fixtures made a permanent part of the building.
h.Temporary safety fence around site and costs of removing the same.
i.Insurance taken during construction.
j.Ventilation, lighting and elevator systems installed during construction.
DEMOLITION COST 38

The accounting treatment for demolition costs depends on the reason for the
demolition:

a. To construct a new building

-Capitalized as cost of the NEW BUILDING
-Carrying amount of the building demolished is recognized as LOSS
-Any proceeds from the sale of salvaged material are DEDUCTED FROM THE
DEMOLITION COST

b. To clear the land for possible future sale

-Demolition cost is capitalized only if it enhances the future economic benefits of the
LAND. (otherwise charged to EXPENSE)
ILLUSTRATION 7: 39

Hotdog Company commenced operations at the beginning of the current year, costs
are incurred by the entity.

Payment for land LAND

P1,000,000 LAND
Payment of property taxes in arrears LAND
40,000 EXPENSE
Title searches and insurance LAND
50,000 LAND
Option paid for an alternative land which was not acquired 30,000 BUILDING
Cost of relocating squatters LAND
10,000 BUILDING

Special assessment for city improvements on water system 150,000

ILLUSTRATION 7: 40

Hotdog Company commenced operations at the beginning of the current year, costs
are incurred by the entity.
Architect fee BUILDIN
P230,000 GBUILDIN
Building permit or payment to city hall for approval 120,000 G BUILDIN
Excavation before new construction 110,000GBUILDIN
Safety fence around construction site G
35,000BUILDIN
Safety inspection on building G
30,000
BUILDIN
Removal of safety fence after completion of factory building 20,000 G
LAND
IMPROVEMENTS
New fence surrounding the factory 80,000
LAND
IMPROVEMENTS
Driveways, parking bays, and safety lighting 550,000
LAND
IMPROVEMENTS
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5
MACHINERY
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COST OF MACHINE
The following costs shall be included as part of the "Machinery and Equipment" account:

a.Purchase price, net of VAT

b.Freight, handling, storage and other cost related to acquisition
c.Insurance while in transit.
d.Installation cost, site preparation and assembling costs
e.Cost of testing and trial runs, and other costs necessary in preparing the item for 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 to do so.
g.Fees paid to consultations for advice on the acquisition of the item.
h.Costs of safety rail and platform surrounding the item.
i.Costs of water device to keep the machinery or equipment cool.
j.Irrevocable or irrecoverable purchase tax
ILLUSTRATION 7: 43

Grey Sloan Inc. acquired a machine at the beginning of the current year. The following
costs were incurred:
Cash paid for machine, inclusive of 12% VAT P896,000800,000
Cost of transporting the machine 30,000
30,000
Labor cost of installation by expert filter 50,00050,000
Labor cost of testing machine 40,000
40,000
Cost of safety rails and platform surrounding machine 60,000 60,000
Cost of water device to keep machine cool 80,00080,000
Cost of adjustment to machine to make it more efficient 45,000 45,000
Estimated dismantling cost to be incurred as required by contract 75,000 75,000
Insurance cost for the current year EXPENSE
65,000
Cost of training personnel who will use the machine 15,000 EXPENSE
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END
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