PLANT, PROPERTY AND EQUIPMENT

RECOGNITION AND MEASUREMENT

 RECOGNITION

The cost of an item of PPE is recognized as an

asset if and only if:

A.) It is probable that future economics benefits

associated with the item will flow to the entity;
B.) the cost of the item can be measured reliably.
MEASUREMENT:
An item of PPE is initially measured as its cost. Cost
includes:

A.) its purchase price, including import duties and non-

refundable purchase taxes, after deducting trade
discounts and rebates;
B.) any costs directly attributable to bringing the asset to
the location and condition necessary for it to be
capable of operating in the manner intended by
management; and
C.) the estimated costs of dismantling and removing the
item and restoring the site on which it is located,
unless those costs relate to inventories produced
during that period.
ACQUISITION OF PROPERTY

There are many ways of acquiring a

property and each presents a
costing problem for accounting
purposes, namely:
Acquisition through Cash Basis

 Cash price equivalent

 The cost of asset acquired on cash basis
includes cash paid plus directly attributable
cost such as freight, installation cost and
other cost necessary in bringing the asset
to the location and condition for the
intended use.
 “Basket Price” or “Lump Sum Price”
ILLUSTRATION…
 Land and building are acquired at a single cost
of ₱5,500,000. At the time of acquisition, the
land has a fair value of ₱1,000,000 and the
building, ₱4,000,000.

Fair Value Fraction Allocated Cost

Land 1,000,000 1/51 1,100,000

Building 4,000,000 4/5 4,400,000
TOTAL 5,000,000 5,500,000
Acquisition on Account
 The cost of the asset is equal to the invoice price
minus the discount, regardless of whether the discount
is taken or not.

 If the discount is not taken, the same is charged to

purchase discount lost account which is shown as
other expense.

 Cash discount are considered as reduction of cost not

as income
 ILLUSTRATION…
An equipment is purchased for ₱100,000, 2/10,
n/30. The purchase may be recorded using either
the gross method or net method.

 GROSS METHOD

1. To record the Acquisition:

Equipment 100,000
Accounts Payable 100,000
ILLUSTRATION…
2. To record the payment within the discount period:

Accounts Payable 100,000

Cash 98,000
Equipment (2%x100,000) 2,000

3. To record the payment beyond the discount period:

Accounts Payable 100,000

Purchase discount lost 2,000
Cash 100,000
Equipment 2,000
Acquisition on Installment Basis
 ILLUSTRATION:

A machinery is purchased at an installment

price of ₱350,000. The terms are ₱50,000 down
and the balance payable in three equal equal
annual installments.

The cash price of the machinery is ₱290,000.

A promisory note is issued for the installment

balance of ₱300,000.
 ILLUSTRATION…
 JOURNAL ENTRY:
1. To record the acquisition of the machinery

Machinery 290,000
Discount on Note Payable 60,000
Note Payable 300,000
Cash 50,000
2. To record the first installment payment

Note Payable 100,000

Cash 100,000
 ILLUSTRATION…
3. To amortize the discount in note payable:

Interest Expense 30,000

Discount on Note Payable 30,000

Note Payable Fraction Interest Expense

st
1 Year 300,000 3/6 30,000
nd
2 Year 200,000 2/6 20,000
rd
3 Year 100,000 1/6 10,000
TOTAL 600,000 60,000
No Available Cash Price
 ILLUSTRATION:

A machinery is acquired at an istallment price of

₱700,000. The terms are ₱100,000 down and the
balance payable in three equal annual installments.

NOTE: is issued for the balance of ₱600,000. There is no

available cash price for the machinery. However, the
implied interest rate for this type of note is 10%.
 ILLUSTRATION…
 COST OF MACHINERY
Using the implied interest rate of 10%, the present
value of an ordinary annuity of 1 is 2.487 for three
periods.
Down payment 100,000
Present Value of NP 497,400
(200,000x2.487)
Total Cost 597,400

Note Payable 600,000

Present Value of NP 497,400
Implied Interest 102,600
 JOURNAL ENTRY
1. To record the acquisition:

Machinery 597,400
Discount on NP 102,600
Cash 100,000
Note Payable 600,000

2. To record the first installment payment:

Note Payable 200,000

Cash 200,000
3. To amortize the discount on note payable:
Interest Expense 49,740
Discount on NP 49,740

Year Payment Interest Principal Present Value

Jan. 1 497,400
st
1 Year 200,000 49,740 150,260 347,140
nd
2 Year 200,000 34,714 165,286 181,854
rd
3 Year 200,000 18,146 181,854 --------
ILLUSTRATION…
CURRENT LIABILITY:
Note Payable 200,000
Discount on Note Payable (34,714)
Carrying Amount 165,286

NON CURRENT LIABILITY:

Note Payable 200,00

Discount on Note Payable (18,146)
Carrying Amount 181,854
Acquisition Through Issuance of Share Capital

 The proceeds shall be measured by the fair

value of the consideration received.

a. Fair value of the property received.

b. Fair value of the share capital.
c. Par value or stated value of the share
capital
ILLUSTRATION…
A piece of land is acquired by issuing 20,000
shares with par value of ₱50. At the time of
acquisition, the fair value of the land is
₱1,600,000 and the share is quoted at ₱90 per
share.

A.) The fair value of the land is used.

Land 1,600,000
Share Capital (20,000x ₱50) 1,000,000
Share Premium 600,000
ILLUSTRATION…
B.) The fair value of the share capital is used:

Land(20,000x90) 1,800,000
Share Capital 1,000,000
Share Premium 800,000

C.) The par value of the share capital is used:

Land 1,000,000
Share Capital 1,000,000
ACQUISITION THROUGH BONDS PAYABLE

 Acquisition of items Of PPE by issuing bonds payable

is accounted for in much the same way as issuing any
other debt instrument. Items of PPE acquired through
issuance of acquired through issuance of bonds
payable are measuring using the following order of
priority.
1. Fair value of bonds payable
2. Fair value of asset received
3. Face amount of bonds payable

 The cost of an item of PPE is the cash price equivalent

at the recognition date
 The cash price of equivalent of an item of PPE , at the
recognition of date is equal to its fair value at the
recognition date.

 Provides that “ the fair value of a financial instrument at

initial recognition is normally the transaction price.”

 When issuing bonds payable in exchange for an item of

PPE, the transaction price is the cash equivalent of the
PPE acquired, that is the amount that would have been
paid if the entity acquired the PPE on cash basis rather
that by issuing the bonds payable.
ILLUSTRATION:
A building is acquired by issuing bonds payable with
face amount of P5,000,000.
At the time of acquisition, the fair value of the building
is P6,000,000 and the quoted price of the bonds is
P5,800,00.

JOURNAL ENTRY
 Case 1: The Fair Value of the bonds payable is used:

Building 5,800,000
Bonds Payable 5,000,000
Premium on bonds payable 800,000
ILLUSTRATION…
 Case 2: The fair value of the building is used.

Building 6,000,000
Bonds Payable 5,000,000
Premium on bonds payable 1,000,000

 Case 3: The face amount of the bonds payable is used.

Building 5,000,000
Bonds Payable 5,000,000
ACQUISITION THROUGH EXCHANGE

 One or more items of PPE may be acquired in

exchange for (a) non-monetary asset/s or (b) a
combination of monetary and non-monetary assets.
 Commercial substance is defined as the event or
transaction causing the cash flows of the entity to
change significantly by reason of the exchange.
 If a property is acquired in an exchange with
commercial substance and there is no cash involved ,
the cost is measured at the following order of priority.
1. Fair value of the property Given.
2. Fair value of the property Received.
3. Carrying amount of the Given.
EXCHANGE- NO CASH INVOLVED

 ILLUSTRATION:

An investment in equity security with carrying amount

of P500,000 is exchanged for an equipment with a fair
value of P550,000. At the time of exchange, the
investment has a fair value of P530,000.

 Case 1: The fair value of investment is used:

Equipment 530,000
Investment in equity security 500,000
Gain on exchange 30,000
ILLUSTRATION...
 Case 2: The fair value of equipment is used:

Equipment 550,000
Investment in equity security 500,000
Gain on exchange 50,000

 Case 3: The carrying amount of the investment is used:

Equipment 500,000
Investment in equity security 500,000
NOTE: if the exchange has a commercial substance and is measured at the
fair value, any gain or loss of exchange is fully recognized.
EXCHANGE- CASH IS INVOLVED

 If the property is acquired in an exchange

and there is cash involved, the cost of the
property is equal to the following:

1. Fair value of asset given plus cash payment

(on the part of the payor.)
2. Fair value of asset given minus the cash
received (on the part of the payee)
 ILLUSTRATION…
 Case 1: With Fair value of asset given up

ABC Co. exchanged equipment with XYZ Inc. Data are shown
below.
ABC XYZ
Equipment 1,000,000 2,000,000
Accumulated Dep. 200,000 800,000
Carrying amount 800,000 1,200,000
Fair value 950,000 1,100,000
Cash Paid by ABC to XYZ 150,000 150,000
 ILLUSTRATION…
 ABC Co. (Payor)
The cost of the equipment received by ABC co. in the exchange
is computed as follows:
Fair value of asset given up 950,000
Cash paid 150,000
Cost of asset received by ABC Co. 1,100,000

Journal Entry: In the books of ABC Co.

Equipment- New 1,100,000
Accumulated Dep. 200,000
Equipment-Old 1,000,000
Cash in Bank 150,000
Gain on Exchange 150,000
 ILLUSTRATION…
 COMPUTATION OF GAIN/LOSS ON EXCHANGE

Fair value of asset given up 950,000

Carrying Amount (800,000)
Gain on Exchange 150,000

 XYZ Inc. (Payee)

The cost of the equipment received by XYZ Inc. in the exchange

is computed as follows:
Fair value of asset given up 1,100,000
Cash received (150,000)
Cost of asset received by XYZ Inc. 950,000
 ILLUSTRATION…
 Journal Entry: In the books of XYZ Inc.

Equipment- New 950,000

Cash in Bank 150,000
Accumulated Dep. 800,000
Loss on Exchange 100,000
Equipment-Old 2,000,000

NOTE: Cash paid on an exchange is added to the cost of

the asset received while cash received is deducted from
the cost of the asset.
 ILLUSTRATION…
 Case 2: Fair value of asset given up is indeterminable.

ABC Co. cannot determined the fair value of the equipment

given up but is aware that the equipment that received from
XYZ Inc. has a fair value of P1,100,000.

JOURNAL ENTRY:

Equipment- New 1,100,000

Accumulated Dep. 200,000
Equipment-Old 1,000,000
Cash in Bank 150,000
Gain on Exchange 150,000
 ILLUSTRATION…
 If the fair value of the asset received is used in
measuring the cost of an asset received in exchange, any
cash received or paid will have an effect on the
computation of the gain or loss on sale.

Fair value of asset received 1,100,000

Cash Paid (150,000)
Assume fair value of asset given up 950,000
Carrying amount of asset given up (800,000)
Gain on Exchange 150,000
 NO COMMERCIAL SUBSTANCE
 ILLUSTRATION:
Use the same information of ABC Co. And XYZ Inc. except that
the exchange has no commercial substance.
 SOLUTION:

The asset received will be measured at the carrying amount of

asset given adjusted for any cash receipt or payment.

ABC Co. (Payor)

The cost of equipment received is computed as follows:

Carrying amount of asset given up 800,000

Cash Paid 150,000
Cost of asset received by ABC Co. 950,000
 ILLUSTRATION…
 JOURNAL ENTRY:
Equipment- New 950,000
Accumulated Dep. 200,000
Equipment-Old 1,000,000
Cash in Bank 150,000

XYZ Inc.(Payee)
The cost of equipment received is computed as follows:

Carrying amount of asset given up 1,200,000

Cash Received (150,000)
Cost of asset received by ABC Co. 1,050,000
 ILLUSTRATION…
 JOURNAL ENTRY:

Equipment- New 1,050,000

Cash on hand 150,000
Accumulated Dep. 800,000
Equipment-Old 2,000,000

NOTICE: That no gain or loss is recognized when the

exchange lacks commercial substance.
 Acquisition By Donation
 Items of PPE received as donation are measured
at fair value and accounted for as:
a) Income- if the donor is unrelated party. Any
cost incurred attribute to the receipt of
donation and transfer of ownership is offset.
b) Donated Capital- if the donor is an owner
“donated capital” is presented in equity under
share premium or additional paid-in capital.
Any cost incurred attributable to the receipt of
donation and transfer of ownership is offset to
the donated capital account.
c) Government Grant- if the donor is government.
 ILLUSTRATION…
 ABC Co. received donation equipment from XYZ Inc. an
unrelated foreign corporation. The equipment has a fair
value of P1,000,000. Necessary cast incurred by ABC Co.
to bring the asset to its intended condition for use
amounted P10,000.

JOURNAL ENTRY:

Equipment 1,000,000
Cash in Bank 10,000
Income from donation 990,000
 ILLUSTRATION…
 Assuming the donor is a shareholder of ABC Co.
the entry will be:

Equipment 1,000,000
Cash in Bank 10,000
Donated Capital 990,000
 Acquisition By Trade In
 Means that a property is acquired by exchanging another
property as part payment and the balance payable in cash
or any other form of payment in accordance with agreed
terms.
 Involves a non-dealer acquiring the asset from a dealer.
 Trade in usually involves a significant amount of cash and
therefore the transaction has commercial substance.
 As an exchange with commercial substance the new asset is
recorded at the following order of priority.

a) Fair value of asset given plus cash payment.

b) Trade in value of asset given plus cash payment( in effect ,
this is the fair value of the asset received.
 ILLUSTRATION…
 An entity traded an old equipment with a dealer for newer
model.

OLD EQUIPMENT
Cost 1,400,000
Accumulated dep. 1,000,000
Carrying Amount 400,000
Fair value 350,000
Trade in value 500,000

NEW EQUIPMENT
List Price 2,000,000
Trade in value of old equipment (500,000)
Cash Payment 1,500,000
 FAIR VALUE APPROACH
 The new asset is recorded at the fair value of the asset
given plus cash payment.

Fair value asset given 350,000

Cash payment 1,500,000
Cost of new asset 1,850,000

Fair value of asset given 350,000

Less: Carrying amount 400,000
Loss on Exchange (50,000)
 JOURNAL ENTRY:

Equipment- new 1,850,000

Accumulated dep. 1,000,000
Loss on exchange 50,000
Equipment-old 1,400,000
Cash 1,500,000
TRADE IN APPROACH
 If the fair value of asset is not clearly determinable, the
new asset is recorded at the trade in value of the asset
given plus cash payment.

Equipment- new 2,000,000

Accumulated dep. 1,000,000
Equipment-old 1,400,000
Cash 1,500,000
Gain on exchange 100,000
JOURNAL ENTRY:

Trade In value of asset given 500,000

Cash payment 1,500,000
Cost of new asset 2,000,000

Trade In value of asset given 500,000

Less: Carrying amount 400,000
Gain on Exchange (100,000)
Acquisition By Construction
 The cost of self-constructed asset is determined using
the principles as for an acquired asset.
The cost of self-constructed PPE shall include:
1. Direct cost of materials
2. Direct Cost of Labor
3. Indirect cost and incremental overhead specifically,
identifiable or traceable to the construction.
 If the incremental overhead is not specifically
identifiable allocation of overhead is may be done on
the basis of direct labor cost or direct labor hours.
ILLUSTRATION…
 OVERHEAD ALLOCATION
An asset is constructed and the following costs are
incurred:

Materials (normal, 1,000,000) 1,300,000

Labor (normal, 800,000) 1,000,000
Manufacturing Overhead 900,000
3,200,000
 ILLUSTRATION…
Constructed Finished Total
Asset Goods

Materials 300,000 1,000,000 1,300,000

Labor 200,000 800,000 1,000,000
Manufacturing 180,000 720,000 900,000
Overhead
TOTAL 680,000 2,520,000 3,200,000

 NOTE: that the overhead is allocated to the constructed

asset and finished goods on the basis of direct labor cost.
ILLUSTRATION…
Direct Labor Fraction Overhead

Constructed Asset 200,000 2/10 180,000

Finished Goods 800,000 8/10 720,000
TOTAL 1,000,000 900,000