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Chapter 25 – Property, Plant and Equipment Initial measurement

PPE are tangible assets that are PPE shall be measured at COST.

• held for use in production or supply of Elements of cost:

goods or services,
• Purchase price + import duties +
• for rental to others, or (Except Land nonrefundable purchase taxes (after
and Building) deducting trade discounts and
• for administrative purposes, and
1. VAT company cannot capitalize
• are expected to be used during more
tax; thus, it is not included in the
than one period.
Examples of PPE 2. Non-VAT company can capitalize
tax and add it to the Cost
• Land • Motor vehicle
• Furniture and • Cost directly attributable to bringing
• Land
Fixtures the asset to its location and intended
improvements • Office condition
• Building equipment • Initial estimate of the cost of
• Patterns, molds dismantling and removing the item
• Machinery
and dies
• Ship Directly attributable costs
• Tools
• Aircraft • Bearer plants • Employee benefits directly from
acquisition of PPE

• Site preparation

Spare parts and servicing equipment • Initial delivery and handling cost

• Carried as Inventory and expensed • Installation and assembly cost

when consumed. • Professional fees
• Major spare parts and stand-by • Costs of testing whether the asset is
equipment qualify as PPE when properly functioning
expected to be used for more than
one period.


• Probable that future economic

benefits will flow to the entity

• Cost of asset can be reliably measured

Costs expensed & not included in PPE cost CASH BASIS

• Opening a new facility (Opening • Cash price equivalent at the

Ceremony) recognition date.

• Introducing a new product or service, • Cash paid plus directly attributable

including costs of ads and promo costs

• Conducting business in a new • Freight, installation cost,

location, or with new customers, and other necessary costs in
staff training (Training = Expense) bringing the asset to its
intended location and
• Administrative and other general
overhead costs
• Basket price – use FV to apportion
• Costs incurred to enable the item to
the price using the fraction of FVs
be on full capacity
(Like purchasing land or building,
• Initial operating losses amount cannot be specified what part
is the building and land; thus using FV)
• Relocating or reorganizing
Subsequent measurement
• Cost is equal to the invoice price
• Cost Model minus the discount, regardless of
Cost = Acquired Cost – Accum. Dep.- Accum. whether the discount was taken or
Impairment Loss not.

• Revaluation • Discount not taken is charged to PD-

lost, presented as other expenses
FV at the revaluation date – Subsequent
Accum. Dep. – Subs. Accum. Impairment Loss • Cash discounts are generally
considered as reduction of cost and
not income.
• CASH BASIS • Cost is the Cash price equivalent
• ON ACCOUNT SUBJECT TO CASH • Installment price – Cash price equiv.
DISCOUNT = Interest
• INSTALLMENT BASIS • Interest to be amortized over the

• ISSUANCE OF BONDS PAYABLE • If no cash price equivalent, use PV of

all payments using an implied interest
• DONATION • EIM (Effective Interest Method) is
used in amortizing the discount on NP
as interest expense.
b) FV of asset given or the FV of
the asset received is not
reliably measured
• When shares are issued for
consideration other than actual cash,
the proceeds shall be measured at the • Cost of property is equal to the
FV of the consideration received. following:

• When property is acquired through a) FV of the asset given plus any cash
share issuance, the property shall be payment – on the part of the payor;
measured equal to the following in
b) FV of asset given minus any cash
the order of priority:
received – on the part of the
• FV of property received recipient.

• FV of the share capital BY EXCHANGE – NO COMMERCIAL

• Par value or stated value of
the share capital • PPE measured at the Carrying amount
of the asset given (No gain/loss
• When an entity acquires an asset by
• Any cash involved is added to the
issuing bonds payable, PFRS 9,
carrying amount on the part of the
provides that the entity shall measure
payor and deducted from CA on the
the financial liability at FV plus direct
part of the recipient.
• Assets acquired by issuing bonds
payable is measured in the following • is a form of exchange
• property is acquired by exchanging
a. FV of bonds payable another property as part payment and
the balance in cash or any other form
b. FV of asset received
as agreed.
c. Face amount of bonds
• Trade in usually involves a significant
amount of cash, thus transaction has
BY EXCHANGE commercial substance.

• Cost of an item of PPE acquired in • New asset is recorded at the ff order

exchange for a non- monetary asset of priority:
or a combination of monetary and
• FV of asset given plus cash
non-monetary asset is measured at
• Trade in value of asset given
• Exchange is recognized at carrying
plus cash payment ( in effect,
amount under the following
this is the FV of the asset
received )
a) Exchange transaction lacks
commercial substance
*if not, allocation may be done on the basis of
DL cost or DL hours.

• Contributions received from
shareholders shall be recorded at the • Actual Cost of Construction <
FV with the credit going to the Purchase Price from Outside parties,
donated capital difference is savings.

• Expenses incurred in connection with • Saving is realized in future periods by

the donation like registration fees & reason of lower depreciation.
legal fees are charged to the donated
• Any internal profit is eliminated for
capital account
the cost of self constructed asset.
• directly attributable costs incurred
• if opposite of 1st bullet above, the
subsequently such as installation and
constructed asset is recorded at
testing cost to bring donated asset to
actual cost, no loss is recognized.
its intended location or condition shall
be capitalized • If cost is overly excessive excess shall
be treated as a loss chargeable
• Non-shareholders sometimes give
against management (PAS 16)
gifts or grants of funds or other assets
that are restricted for PPE additions. CONSTRUCTION – INTERVENING
• Capital gifts or grants are generally
subsidies recognized as income • Example – Construction site used as
paid parking.
• when capital gifts and grants are not
subsidies, the offsetting credit is a • Income and expenses incurred are
liability account until the initial recognized in P&L
restrictions are met, then it is
transferred to income DERECOGNITION

CONSTRUCTION • Cost of PPE and the related

Accumulated depreciation shall be
• The cost of self constructed asset is removed from the accounts.
determined using the same principles
as for an acquired asset. • PAS 16 provides that the carrying
amount of a PPE shall be
• The cost of self constructed PPE shall derecognized on disposal or when no
include: future economic benefits are
expected from the use or disposal.
1. Direct cost of materials
• Gain or loss from derecognition of PPE
2. Direct cost of labor
shall be part of P&L
3. Indirect cost and incremental
• G/L is the difference between Net
overhead specifically
disposal proceeds vs. CA of the item.
traceable* to the construction

• When CA is equal to Zero or the CA is a) CA of temporarily idle PPE

equal to residual value
b) Gross CA of any fully depreciated PPE
• Asset and AD accounts are closed and still in use
the residual value is set up in another
c) CA of PPE retired from active use and
classified as held for sale
• Fully depreciated asset may still be
d) When Cost Model is used, the FV of
used and not removed from the
PPE when this is materially different
from the CA.
• Entities are encouraged to disclose
the Fully depreciated assets


• If asset is available for immediate sale

in the present condition within one
year from the date of classification as
held for sale

• Excluded from PPE but presented

separately as Non-current asset.

• PFRS 5 provides that an entity shall

measure a Non-current asset
classified as held for sale at the lower
of CA or FV less cost to dispose.

• Writedown is considered as
Impairment loss.

• PFRS 5 – Non Current Asset held for

sale shall NOT be depreciated.


• CA would be recovered through

continuing use

• temporary idle activity does not

preclude depreciating the asset as
future benefits are consumed not only
through usage but also through wear
and tear and obsolescence.

Problem 25-1 (2019)/ Problem 23-1 (2020)

Requirement: Prepare Journal Entries to record the transactions for the current year.

Erica Company had the following property acquisitions during the current year:

1. Acquired a tract of land in exchange for 50,000 ordinary shares with P100 par value and
market price of P120 per share on the date of acquisition.

The Last property tax bill indicated assessed value of P4,500,000 for the land.

*Note follow the order to get the value of land*

1. FV of property received; not 1, because assessed value isn’t fair value.

2. FV of the share capital; use 2, because fair value of the share issued is the market price.

3. Par value or stated value of the share capital

Journal Entry

Land (50,000 x 120) 6,000,000

Share Capital (50,000 x 100) 5,000,000

Share Premium 1,000,000

2. Received land from a major shareholder as an inducement to locate a plant in the city.

No Payment was required but the entity paid P50,000 for legal expenses for land transfer.
The land is fairly valued at P1,000,000.

Journal Entry

Land 1,000,000

Donated Capital 1,000,000

Donated Capital 50,000

Cash 50,000
3. Purchased for P5,500,000, including appraiser fee of P100,000 a warehouse building and
the land on which it is located.

The Land had an appraised value of P2,000,000 and original cost of P1,400,00. The building
has an appraised value of P3,000,000 and original cost of P2,500,000

Bought by basket price, thus the amount should be allocated accordingly, by using the fair
value (appraised value)

Land (2/5 x 5,500,000) 2,200,000

Building (3/5 x 5,500,000) 3,300,000
Cash 5,500,000

4. Purchased an office building and the land on which it is located for P7,500,000 cash and
assumed an existing P2,500,000 mortgage.

For realty tax purposes, the property is assessed at P9,600,000, 60% of which is allocated to

Land (40% x 10,000,000) 4,000,000

Building (60% x 10,000,000) 6,000,000

Cash 7,500,000

Mortgage Payable 2,500,000

Problem 25-2

Required: Prepare journal entries for 2019 and 2020

Credulous Company purchased equipment on January 1, 2019 under the following terms:

a. P200,000 down payment

b. Five annual payments of 100,000, the first installment note to be paid on
December 31, 2019.

The same equipment was available at a cash price of P580,000.

Journal Entries


Jan 1 Equipment 580,000

Discount on note payable 120,000

Cash 200,000

Note payable 500,000

Dec 31 Notes payable 100,000

Cash 100,000

Interest Expense 40,000*

Discount on Note payable 40,000


Dec 31 Notes payable 100,000

Cash 100,000

Interest Expense 32,000*

Discount on Notes Payable 32,000

Amortization Table
Notes Payable Fraction Amortization
500,000 5/15 40,000*
400,000 4/15 32,000*
300,000 3/15 24,000
200,000 2/15 16,000
100,000 1/15 8,000
1,500,000 15/15 120,000
Problem 25-4

Anson Company had the following machinery during the year:

Required: Prepare journal entries to record the machinery acquisitions and related interest.

1. Acquired a machine with an invoice price of P3,000,000 subject to a cash discount of 10%
which was not taken.

The Entity incurred cost od P50,000 in removing the old machine prior to installation of the
new one. Machine supplies were acquired at a cost of P150,000.


1. You can net the machinery P2,700,000

2. Spare parts are not PPE but Inventory

Journal Entries - Gross Net


Machinery 3,000,000 Machinery 2,700,000

Accounts Payable 3,000,000 Accounts Payable 2,700,000


Accounts Payable 3,000,000 Accounts Payable 2,700,000

Purchase discount lost (3Mx10%) 300,000 Purchase Discount lost 300,000

Cash 3,000,000 Cash 3,000,000

Machinery 300,000

Loss on retirement of old Machine 50,000 Same Entry

Spare parts inventory 150,000

Cash 200,000
2. During the early part of current year, the entity purchased a machine for P500,000 down
and four monthly installments of P1,250,000. The cash price of the machine was


1. Because it is only 1-year use interest expense not discount; Discount is used when the
note payable takes years.

Journal Entries


Machinery 4,700,000

Interest Expense 800,000

Cash 500,000

Notes payable 5,000,000


Notes Payable 5,000,000

Cash 5,000,000

3. At the beginning of current year, the entity purchased a machine for P2,000,000 in exchange
for a noninterest bearing note requiring four payments of P500,000. The first payment was
made at the end of current year.

The implicit rate of interest for this note at date of issuance was l0%. The present value of
an ordinary annuity of I at 10% is 3. 17 for four periods.

The present value of an annuity of 1 in advance at 10% is 3.49 for four periods.

1. Ordinary annuity is used when payment is used in the end of the period. (Use
2. Annuity in Advance is used when payment is at the beginning of the period.

Journal Entries
Machinery (500,000 x 3.17) 1,585,000
Discount on note payable 415,000
Note payable 2,000,000
Payment – End of the Year
Note Payable 500,000
Cash 500,000

Interest Expense (1,585,000 x 10%) 158,500

Discount on note payable 158,500
4. At the beginning of current year, the entity acquired a machine by issuing a four-year,
noninterest-bearing note for P2,000,000.

The entity has an implicit 10% interest for the type of note. The present value of 1 at 10% for
4 years is 0.68.


1. Lumpsum payment so use present value of 1

Journal Entries


Machinery (2,000,000 x .68) 1,360,000

Discount on note payable 640,000

Note payable 2,000,000


Interest Expense (10% x 1,360,000) 136,000

Discount on note Payable 136,000

Problem 25-6

Required: Journal Entries to record the transactions.

Cherish Company provided the following transactions:

1. Exchanged a car from inventory for a computer to be used as a long-term asset.

Carrying amount of the car 300,000

Listed selling price of the car 450,000

Fair value of the computer 430,000

Cash difference paid by Cherish Company 50,000

Journal Entries

Computer 430,000

Inventory (car) 300,000

Cash 50,000

Gain on Exchange 80,000

2. Exchanged an old packaging machine which cost P240,000 and was 50% depreciated, for
new machine and paid a cash difference of P30,000.

The fair value of the old packaging machine is determined to be P110,000 and the list price
of the new machine is P 150,000.

Journal Entries

Machinery-new (110,000+30,000) 140,000

Accumulated Depreciation 120,000

Loss on Exchange (Note 1) 10,000

Machinery-old 240,000

Cash 30,000

Note 1

Fair value of asset given 110,000

Less: Carrying Amount (240,000 – 120,000) 120,000

Loss on Exchange ( 10,000)

3. Exchanged an old equipment costing P3,000,000 with accumulated depreciation of

P1,800,000 and fair value of P1, 000, 000 for another used equipment with fair value of
P1,200, 000. The exchange is nonmonetary.

Journal Entries

Equipment-new 1,000,000

Loss on exchange 200,000

Accumulated depreciation 1,800,000

Equipment-old 3,000,000
Problem 25-9

Required: Prepare journal entry to record the exchange transaction.

Mellow Company acquired a delivery truck, making payment of P2,680,000, the payment being
analyzed as follows:

Price of truck 2,500, 000

Charge for extra equipment 50,000

Value added tax 300,000

Insurance for one year 120,000

Motor vehicle registration 10,000

Total 2,980,000

Less: Trade in value allowed on old truck 300,000

Cash paid 2,680,000

The old truck cost P1,500,000 and has a carrying amount of P200,000, and fair value of P50,000. The
value added tax is refundable or recoverable.

Journal Entries

Delivery Equipment-New (Note 1) 2,300,000

Accumulated Depreciation 1,300,000

Loss on exchange (FV 50,000 – CA 200,000) 150,000

Input tax 300,000

Insurance 120,000

Taxes and Licenses 10,000

Delivery Equipment – Old 1,500,000

Cash 2,680,000

Note 1

Fair Value of asset given 50,000

Cash Paid 2,680,000

Total 2,730,000

Less: VAT 300,000

Insurance 120,000

Registration Fee 10,000 430,000

Cost of New asset 2,300,000

Problem 25-11

Acrophobia Company summarized manufacturing and construction activities for 2019 as follows:

Finished goods Machinery

Materials 3,000,000 500,000

Direct labor 4,000,000 1,000,000

Overhead for the prior year was 75% of the direct labor cost. Overhead in 2019 related to both
product manufacture and construction activities amounted to P3,600,000.


a. Calculate the cost of the machinery, assuming that manufacturing activities are to be
charged with overhead at the rate experienced in the prior year.

Materials 500,000

Direct Labor 1,000,000

Overhead (Note 1) 600,000

Cost of Machinery 2,100,000

Note 1

Overhead 3,600,000

Overhead to Finished Goods 3,000,000

Charged to Machinery 600,000

b. Calculate the cost of the machinery if manufacturing and construction activities are to be
charged with overhead at the same rate.

Materials 500,000

Direct Labor 1,000,000

Overhead (1/5 x 3.6M) 720,000

Cost of Machinery 2,220,000

Direct Labor

Finished Goods (4/5) 4,000,000

Machinery (1/5) 1,000,000