Notes On Property, Plant and Equipment
Notes On Property, Plant and Equipment
Notes On Property, Plant and Equipment
The standard does apply to bearer plants but it does not apply to the produce on bearer
plants. [IAS 16.3] which applies to annual periods beginning on or after 1 January 2016.
D. BORROWING COST – interest and other costs that the entity incurs in connection
with borrowing of funds for the purchase, construction or production of qualifying
assets.
E. SUBSEQUENT COSTS
F. DEPRECIATION METHODS
Depreciation Rationale of the Method Formula of Computing Annual
Methods Depreciation
Straight line This is adapted when the major Cost – Salvage Value or Residual Value
reason of depreciation is passage of Estimated Useful life in years
time giving each period equal
amount.
Group of dissimilar assets in terms of 1. The composite rate (total annual
Composite characteristics and useful life treated depreciation / total cost ) is multiplied to
as a single unit the total cost to get depreciation
expense
2. When asset is retired, Accumulated
Depreciation is debited equal to the
Group of similar assets in terms of cost credited minus any debited
characteristics and useful life treated proceeds. No gain, No loss
Group as a single unit 3. When asset is replaced, assets is
debited and the corresponding
payments or liabilities are credited
4. Multiply the composite rate by the
balance of the asset accounts for
succeeding periods to get the
depreciation expense
Working Hours Based on the usage or function of 1. Depreciation Rate per hour or output =
asset used. Cost-Salvage / estimated use
Output/Productio Based on the output of the asset hours/output
n produced 2. Multiply actual hours used or output
produced x Depreciation rate
A decreasing charge method
whereby the depreciable cost is (Cost – Salvage) x Digit of the Year
Sum of the years’ multiplied by decreasing series of Sum of the Years Digit
Method fractions where the numerator is
equal to the digit of the year in
consideration while the denominator
is equal to the total digits of the years
This method cannot be used unless Rate ( 1- Residual Value / Cost) x
Declining Balance there is a residual value. In the diminishing book value
absence of residual value , we can
assigned P 1
A fixed rate is multiplied by the Rate ( 100%/ estimated life x 2) c
Double Declining declining carrying or book value. diminishing book value
The fixed rate is equal to double the
Straight line rate
This is generally applied to small Balance per Inventory at year end –
Inventory method inexpensive items. This method is Balance per Inventory Account =
not systematic. No contra asset Depreciation Expense
account is maintained, deoreciation
is credited direcly from the asset
account
Retirement No depreciation is recorded unless Original Cost of Asset Retired – Proceeds
there is asset retired.
1. If retired and replaced, depreciation =
No depreciation is recorded unless Replacement cost of assets retires –
Replacement Assets are retired and replaced proceeds
2. If retired but not replaced original cost
of that asset is depreciation
Under the revaluation model, revaluations should be carried out regularly, so that the
carrying amount of an asset does not differ materially from its fair value at the balance
sheet date. [IAS 16.31]. If an item is revalued, the entire class of assets to which that
asset belongs should be revalued. [IAS 16.36]
Revalued assets are depreciated in the same way as under the cost model (see below).
When a revalued asset is disposed of, any revaluation surplus may be transferred
directly to retained earnings, or it may be left in equity under the heading revaluation
surplus. The transfer to retained earnings should not be made through profit or loss.
[IAS 16.41]
4. The depreciation method should be reviewed at least annually and, if the pattern
of consumption of benefits has changed, the depreciation method should be
changed prospectively as a change in estimate under IAS 8. [IAS 16.61]
Expected future reductions in selling prices could be indicative of a higher rate of
consumption of the future economic benefits embodied in an asset. [IAS 16.56]
Note: The guidance on expected future reductions in selling prices was introduced
by Clarification of Acceptable Methods of Depreciation and Amortisation, which applies
to annual periods beginning on or after 1 January 2016.
Any claim for compensation from third parties for impairment is included in profit or loss
when the claim becomes receivable. [IAS 16.65]
If an entity rents some assets and then ceases to rent them, the assets should be
transferred to inventories at their carrying amounts as they become held for sale in the
ordinary course of business. [IAS 16.68A]
Disclosure
For each class of property, plant, and equipment, disclose: [IAS 16.73]
2.Additional disclosures
compensation from third parties for items of property, plant, and equipment that
were impaired, lost or given up that is included in profit or loss.
IAS 16 also encourages, but does not required, a number of additional disclosures. [IAS
16.79]
for each revalued class of property, the carrying amount that would have been
recognised had the assets been carried under the cost model
the revaluation surplus, including changes during the period and any restrictions
on the distribution of the balance to shareholders.
Entities with property, plant and equipment stated at revalued amounts are also
required to make disclosures under IFRS 13 Fair Value Measurement.
Acquisition on account
PRECLUDE PREVENT Co. acquired an equipment for ₱448,000 on account with a
credit term of 2/15, n/30. Any discount is computed based on the purchase price. The
purchase price is inclusive of 12% value added tax (VAT). PRECLUDE Co. is VAT-
registered and any input VAT paid is refundable through deduction from monthly output
VAT remitted to the Bureau of Internal Revenue (BIR). Additional costs incurred include
₱40,000 cost of training staff who will be operating the equipment and ₱60,000 cost of
relocating the equipment to a new location after it was installed in a location originally
intended by management. How much is the initial cost of the equipment? a.
400,000 b. 391,040 c. 491,040 d. 392,000
B
Solution:
The initial cost of the equipment is computed as follows:
Purchase price inclusive of VAT 448,000
Divide by: 112%
Purchase price exclusive of VAT 400,000
Cash discount based on purchase price (2% x 448,000) (8,960)
Cash price equivalent 391,040
Classes of PPE
ABC Co. had the following assets on December 31, 20x1.
Land used as plant site 50,000
Land and building classified as held for sale 780,000
Building used as office 500,000
Building rented out under operating lease 420,000
Equipment being sold in the ordinary course of business 330,000
Office furniture 24,000
Fixtures and signage 10,000
Machinery 12,000
Automobiles (used by company officers) 350,000
Delivery trucks (used by the shipping department) 420,000
Computers 70,000
Aircraft rented out to various clients 690,000
Dairy cattle (held to produce milk that is sold to customers) 10,000
Harvested milk 3,000
Apple trees (held to bear fruits to that are sold to customers) 6,000
Harvested apples 2,000
How much is the total of assets classified as property, plant and equipment?
a. 2,132,000 b. 2,126,000 c. 2,142,000 d. 2,148,000
A
Solution:
Land used as plant site 50,000
Building used as office 500,000
Office furniture 24,000
Fixtures and signage 10,000
Machinery 12,000
Automobiles (used by company officers) 350,000
Delivery trucks (used by the shipping department) 420,000
Computers 70,000
Aircraft rented out to various clients 690,000
Apple trees (held to bear fruits to that are sold to customers) 6,000
Total property, plant and equipment 2,132,000
The fractions to be used in the costs allocation are derived from the relative fair values
as follows:
Fair values Fractions
Land 20,000,000 20/60
Building 40,000,000 40/60
60,000,000
Land Building
Purchase price (48M x 20/60); (48M x 40/60) 16,000,000 32,000,000
Legal cost of conveying and registering title 32,000 -
to Land
Payment to tenants to vacate premises 12,000 24,000
(36K x 20/60); (36K x 40/60)
Option paid on the land and building 8,000 16,000
(24K x 20/60); (24K x 40/60)
Broker's fee on the land and building 20,000 40,000
(60K x 20/60); (60K x 40/60)
Unpaid real estate taxes prior to April 1, 120,000 -
20x1 assumed – assessed on land
Repairs and renovation costs before the - 160,000
building is occupied
Totals 16,192,000 32,240,000
B
Solution:
New
Land Old building
building
Total acquisition cost
16,000,000 32,000,000 -
(48M x 20/60); (48M x 40/60)
Title guarantee 80,000 - -
Option paid for the land and old -
building acquired (24K x 20/60); 8,000 16,000
(24K x 40/60)
Payments to tenants to vacate -
premises (48K x 20/60); 16,000 32,000
(48K x 40/60)
Cost of razing the old building
- - 240,000
(demolition cost)
Proceeds from sale of salvaged
- - (60,000)
materials
Fair value of materials salvaged - - -
from the old building and used in
the new building
Construction cost of new building
- - 34,000,000
(completed)
Totals 16,104,000 32,048,000 34,180,000
The land and old building have fair values of ₱20,000,000 and ₱40,000,000,
respectively. How much is charged as loss on initial recognition?
a. 48,000 b. 32,000,000 c. 32,048,000 d. 0
C 32,048,000 – the allocated cost of the old building (see solution above).
The old building is unusable and has an insignificant fair value. How much are the
allocated costs of the land and the new building?
Land New building
a. 46,640,000 33,780,000
b. 46,104,000 34,180,000
c. 48,152,000 34,180,000
d. 46,140,000 34,810,000
The old building is unusable and has an insignificant fair value. How much is charged as
loss on initial recognition?
a. 48,000 b. 32,000,000 c. 32,048,000 d. 0
C
Solution:
Old New
Land building building
Total acquisition cost 48,000,000 - -
Title guarantee 80,000 - -
Option paid for the land and old
24,000 - -
building acquired
Payments to tenants to vacate
48,000 - -
premises
Cost of razing the old building
- - 240,000
(demolition cost)
Proceeds from sale of salvaged
- - (60,000)
materials
Fair value of materials salvaged from
the old building and used in the - - -
new building
Construction cost of new building
- - 34,000,000
(completed)
Totals 48,152,000 - 34,180,000
C
Solution:
The costs are allocated as follows:
Land New
Land
improvement building
Purchase price of lot 8,000,000 - -
Legal cost of conveying land 40,000 - -
Special assessment 20,000 - -
Survey costs 60,000 - -
Materials, labor, and overhead
- - 22,000,000
costs
Cash discounts on materials
- - (120,000)
purchased not taken
Clerical and other expenses
- - 56,000
related to construction
Excavation costs - - 400,000
Architectural fees and building
- - 240,000
permit
Supervision by management
- - 48,000
on construction
Insurance premiums paid for
- - 520,000
workers
Paving of streets and
sidewalks (not included in - 40,000 -
blueprint)
Totals 8,120,000 40,000 23,144,000
Entry:
EXCHANGE
NEW ASSET IS EQUAL TO:
Exchange with commercial A. Fair Value of property given plus cash given or less cash received
substance B. Fair Value of property received
C. Book Value of property given plus cash given or less cash received
Gain or Loss on Exchange = Compare your own asset’s Fair Value VS.
Book Value.
Exchange without New Asset = Book Value of property given plus cash given or less cash
Commercial Substance received. No Gain or loss in exchange to be recognized.
How much is the initial cost of the equipment received by WEAK Co.?
a. 3,800,000 b. 4,400,000 c. 5,000,000 d. 3,400,000
A = 4,400,000 Fair value of asset given up - 600,000 cash received = 3,800,000
Equipment – New 3,800,000
Cash 600,000
Loss on Exchange 400,000
Accumulated Depreciation 3,200,000
Equipment – Old 8,000,000
How much is the initial cost of the equipment received by FEEBLE Co.?
a. 4,400,000 b. 5,000,000 c. 3,800,000 d. 3,400,000
A 4,400,000 – fair value of asset received with no adjustment for cash paid
Equipment – New 4,400,000
Accumulated Depreciation 800,000
Equipment – Old 4,000,000
Cash 600,000
Gain on Exchange 600,000
B
Solution:
Date Equipment – new 4,400,000
Accumulated depreciation 800,000
Cash on hand 600,000
Equipment – old 4,000,000
Gain on exchange 600,000
No commercial substance
Use the fact pattern in the preceding problem except that the exchange has no
commercial substance.
How much is the initial cost of the equipment received by FEEBLE Co.?
a. 4,400,000 b. 5,000,000 c. 3,800,000 d. 3,200,000
Trade-in
Use the following information for the next two questions:
TRANSCEND EXCEED Co. traded in an old machine for a new model. Pertinent data
are as follows:
Old equipment:
Cost 200,000
Accumulated depreciation 80,000
Average published retail value 24,000
New equipment:
List price 380,000
Cash price without trade in 280,000
Cash price with trade in 220,000
How much is the initial cost of the equipment received by TRANSCEND Co.?
a. 244,000 b. 280,000 c. 320,000 d. 184,000
B 280,000 (cash price without trade in) – the Fair value of asset received because the
Fair value of the asset given up is not given.
ASSET IS EQUAL TO
Issuance of Share Capital 1. Fair Value of Consideration received (THE ASSET RECEIVED)
2. Fair Value of Share Capital Issued
3. Par or Stated Value of Shares Issued
How much is the initial cost of the land received by RESILIENT Co.?
a. 400,000 b. 4,000,000 c. 3,600,000 d. 180,000
B 4,000,000 – the fair value of the asset received
Use the fact pattern above except that the fair value of the land is indeterminable. How
much is the initial cost of the land received by RESILIENT Co.?
a. 400,000 b. 4,000,000 c. 3,600,000 d. 180,000
C (10,000 x 360) = 3,600,000 – the fair value of the securities issued
Land 3,600,000
Capital Stock ( 10,000x 40) 400,000
Premium on Capital Stock 3,200,000
How much is the initial cost of the land received by LABYRINTH Co.?
a. 3,800,000 b. 4,000,000 c. 3,807,852 d. 180,000
C 3,807,852 – the fair value of Debt Security
Land 3,807,852
Discount on Bonds Payable 192,148
( 4M – 3,807,852)
Bonds Payable 4,000,000
Use the fact pattern above except that the fair value of the land is indeterminable. How
much is the initial cost of the equipment received by LABYRINTH Co.?
a. 3,800,000 b. 4,000,000 c. 3,807,852 d. 180,000
A 3,800,000 – the fair value of the securities issued
Land 3,800,000
Discount on Bonds Payable 200,000
Bonds Payable 4,000,000
Acquisition by donation
Use the following information for the next two questions:
GROVEL Co. received donation of equipment from CRAWL, Inc., an unrelated foreign
corporation. The equipment has a fair value of ₱4,000,000. Necessary costs incurred by
GROVEL Co. to bring the asset to its intended condition for use amounted to ₱40,000.
Equipment 4,000,000
Income from Donation 4,000,000
D Since the donor is both an unrelated party and a non-government entity, the fair
value of the asset received net of the related cost incurred (4M – 40K = 3.96M) is
credited to income.
Assuming the donor is a shareholder of GROVEL Co., the entry to record the receipt of
the donation includes
a. a credit to share premium of ₱4,040,000 b. a credit to share premium of
₱3,960,000
c. a credit to income from donation of ₱4,040,000 d. a credit to income from
donation of ₱3,960,000
Equipment 4,000,000
Donated Capital (APIC) 4,000,000
B
Since the donor is a shareholder, the fair value of the asset received net of the related
cost incurred (4M – 40K = 3.96M) is credited to share premium.
DEPRECIATION METHODS
Depreciation Rationale of the Method Formula of Computing Annual
Methods Depreciation
Straight line This is adapted when the major Cost – Salvage Value or Residual Value
reason of depreciation is passage of Estimated Useful life in years
time giving each period equal
amount.
Group of dissimilar assets in terms of 5. The composite rate (total annual
Composite characteristics and useful life treated depreciation / total cost ) is multiplied to
as a single unit the total cost to get depreciation
expense
6. When asset is retired, Accumulated
Depreciation is debited equal to the
Group of similar assets in terms of cost credited minus any debited
characteristics and useful life treated proceeds. No gain, No loss
Group as a single unit 7. When asset is replaced, assets is
debited and the corresponding
payments or liabilities are credited
8. Multiply the composite rate by the
balance of the asset accounts for
succeeding periods to get the
depreciation expense
Working Hours Based on the usage or function of 1. Depreciation Rate per hour or output =
asset used. Cost-Salvage / estimated use
Output/Productio Based on the output of the asset hours/output
n produced 2. Multiply actual hours used or output
produced x Depreciation rate
A decreasing charge method
whereby the depreciable cost is (Cost – Salvage) x Digit of the Year
Sum of the years’ multiplied by decreasing series of Sum of the Years Digit
Method fractions where the numerator is Ex. 4 years life.by the fraction to get the
equal to the digit of the year in depreciation
consideration while the denominator 1. Compute the Sum of the digits.
is equal to the total digits of the years Let n = no. of years, n (n+1) / 2
2. Prepare a fraction: numerator is the
digit of the year while denominator is
the sum of the digit. Start from the
highest.
3. Multiply the depreciable cost by the
fraction to get the depreciation
This method cannot be used unless Rate ( 1- Residual Value / Cost) x
Declining Balance there is a residual value. In the diminishing book value.
absence of residual value , we can Ex. 10 years = Yearly rate = 1/10 or 10%.
assigned P 1
A fixed rate is multiplied by the Rate ( 100%/ estimated life x 2) c
Double Declining declining carrying or book value. diminishing book value
The fixed rate is equal to double the Ex. 10 years = Yearly rate = 1/10 or 10% x 2
Straight line rate
This is generally applied to small Balance per Inventory at year end –
Inventory method inexpensive items. This method is Balance per Inventory Account =
not systematic. No contra asset Depreciation Expense
account is maintained, deoreciation
is credited direcly from the asset
account
Retirement No depreciation is recorded unless Original Cost of Asset Retired – Proceeds
there is asset retired.
3. If retired and replaced, depreciation =
No depreciation is recorded unless Replacement cost of assets retires –
Replacement Assets are retired and replaced proceeds
4. If retired but not replaced original cost
of that asset is depreciation
Depreciation methods
Use the following information for the next four cases:
Fact pattern
On January 1, 20x1, SIMPLETON FOOL Co. acquired equipment with an estimated
useful life of 4 years and a residual value of ₱80,000 for a total purchase cost of
₱400,000.
1. Compute For the sum of the year’s digits : n=estimated life in years; n (n+1) / 2
Example : 4 years; (4 x 5) / 2 = 10 (This will be the denominator)
320,000
B
SYD denominator = Life x [(Life + 1) ÷ 2] = 4 x [(4 + 1) ÷ 2] = 10
Depreciation – 2nd yr. = (400,000 – 80,000) x 3/10 = 96,000
1. Double Declining Rate (DDR)= Double the Straight line rate = 2/n
YEAR Depreciation
Expense
10,000
(Correct)
Double declining balance rate = 2/Life = 2/4 = 50% (400,000 x 50% x 50%) =
100,000
If SIMPLETON Co. uses the output method, how much is the depreciation expense in
the 2nd year?
a. 128,000 b. 96,000 c. 60,000 d. 64,000
1. C (400,000 – 80,000) x 30,000 / 160,000 = 60,000
If SIMPLETON Co. uses the output method, how much is the accumulated depreciation
on December 31, 20x2?
a. 120,000 b. 180,000 c. 192,000 d. 256,000
2. B (400,000 – 80,000) x [(60,000 + 30,000) / 160,000] = 180,000
If SIMPLETON Co. uses the input method, how much is the depreciation expense in the
2nd year?
a. 64,000 b. 96,000 c. 60,000 d. 64,000
3. A (400,000 – 80,000) x 8,000 / 40,000 = 64,000
If SIMPLETON Co. uses the input method, how much is the accumulated depreciation
on December 31, 20x2?
a. 120,000 b. 210,000 c. 192,000 d. 256,000
4. C (400,000 – 80,000) x [(16,000 + 8,000) / 40,000] = 192,000
Solution:
Accumu-
Depreciation lated
= (DD rate x depre- Carrying
Date Carrying amount) ciation amount
737,792
Notice that in the table above, the carrying amount of the asset as of December 31,
20x5 is not equal to zero. It should have been zero because the asset does not have a
residual value. Also, the total depreciation charge over the useful life of the asset is
understated by ₱62,208 (800,000 - 737,792).
How much is the depreciation expense in 20x2 under the straight-line method?
a. 37,500 b. 93,750 c. 36,400 d. 35,000
A
Annual Depreciation = (160,000 – 10,000) / 4 = 37,500 per year
How much is the depreciation expense in 20x2 under the sum-of-years’ digits method?
a. 45,000 b. 11,250 c. 56,250 d. 57,250
C (See solutions above)
How much is the depreciation expense in 20x2 under the double declining balance
method?
a. 70,000 b. 60,000 c. 10,000 d. 0
A (See solutions above)
N= 4 years.
Rate per year = ¼ = 25%
Double the rate = 25% x 2 = 50%
Since the first full year of the asset’s life does not coincide with the entity’s accounting
period, the amounts shown above are prorated as follows:
Double
Yea Straight declining
r line SYD balance
20x 60,000 x 9/12 = 80,000 x 9/12 =
2 37,500 45,000 60,000
45,000 x 3/12 = 40,000 x 3/12 =
11,250 10,000
37,500 56,250 70,000
*Since the asset was acquired on September 21, 20x1 (last half of the month), it is
treated as if it has been acquired on October 1, 20x1.
Composite method
Use the following information for the next four questions:
On January 1, 20x1, DEVIOUS CROOKED Co. purchased the following:
Cost Residual value Useful life
Machine tools 80,000 4,000 3 years
Meters costing 64,000 2,000 5 years
Returnable containers 120,000 - 6 years
Depre- Annual
Residual
Cost ciable depre-
value
amt. Useful life ciation
Machine tools 80,000 4,000 76,000 3 25,333
Meters costing 64,000 2,000 62,000 5 12,400
Returnable
containers 120,000 - 120,000 6 20,000
Totals 264,000 258,000 57,733
During 20x3, machine tools with original cost of ₱20,000 and residual value of ₱2,000
were sold for ₱6,000. How much is the gain (loss) on the sale?
a. (345) b. 430 c. (667) d. 0
D No gain or loss is recognized when an individual asset in a group of assets being
depreciated using a group depreciation method is disposed of.
If in the 2nd year , Half of the Machine Tools was sold at P 30,000 and we bought P
20,000 furniture.
Cash 30,000
Accumulated Depreciation 10,000
(80,000 x ½) -30,000
Machine Tools 40,0000
Furniture 20,000
Cash 20,000
Depreciation Expense
Retirement No depreciation is recorded unless Original Cost of Asset Retired – Proceeds
there is asset retired.
1. If retired and replaced, depreciation =
No depreciation is recorded unless Replacement cost of assets retires –
Replacement Assets are retired and replaced proceeds
2. If retired but not replaced original cost
of that asset is depreciation
Assuming ATROCIOUS Co. uses the retirement method, how much is the
depreciation expense in 20x1?
a. 134,800 b. 166,800 c. 144,000 d. 118,800
A
Solution:
Total
Feb. April Sept. Nov.
depreciation
Cost of old small tools
24,000 48,000 - 72,000
retired 144,000
Proceeds from sale (2,000) (3,200) - (4,000) (9,200)
Totals 22,000 44,800 - 68,000 134,800
Assuming ATROCIOUS Co. uses the replacement method, how much is the
depreciation expense in 20x1?
a. 134,800 b. 166,800 c. 144,000 d. 118,800
B
Solution:
Total
Feb. April Sept. Nov.
depreciation
Cost of newly 40,000 - N/A 88,000 128,000
acquired small tools
Cost of old small 48,000 - 48,000
tools retired
Proceeds from sale (2,000) (3,200) - (4,000) (9,200)
of old small tools
Totals 38,000 44,800 - 84,000 166,800
Inventory method
This is generally applied to small Balance per Inventory at year end –
Inventory method inexpensive items. This method is Balance per Inventory Account =
not systematic. No contra asset Depreciation Expense
account is maintained, depreciation
is credited direcly from the asset
account
The small tools account of AUGUST MAJESTIC Co. has a balance of ₱600,000 as of
January 1, 20x1. Acquisitions of small tools during the period totaled ₱240,000 and
proceeds from sale of small tools retired and/or replaced totaled ₱100,000. The annual
asset count on December 31, 20x1 revealed a balance of small tools of ₱440,000. How
much is the depreciation expense under the inventory method?
a. 400,000 b. 300,000 c. 240,000 d. 140,000
B
Solution:
Small tools
Jan. 1, 20x1 bal. 600,000 100,000 Proceeds from retired/replaced tools
Additions 240,000 300,000 Depreciation for 20x1 (squeeze)
440,000 Dec. 31, 20x1 bal.
Revenue method
On January 1, 20x1, COCKY ARROGANT Co. acquired an equipment costing
₱4,000,000. The equipment will be used to reproduce a gaming software which is
expected to be marketed for 3 years. The equipment is expected to be used in
producing products over the next two years, after which, the equipment will be disposed
of at a negligible amount.
Leasehold improvements
Use the following information for the next two questions:
On January 1, 20x1, DIMINUTIVE SMALL Co. signed a ten-year lease for office space.
DIMINUTIVE has the option to renew the lease for an additional five-year period on or
before January 1, 2x10. During the first half of January 20x2, DIMINUTIVE Co. incurred
the following costs:
₱3,600,000 for general improvements to the leased premises with an estimated useful
life of ten years.
₱400,000 for office furniture and equipment with an estimated useful life of ten years.
₱800,000 for movable assembly line equipment with useful life of 5 years.
At the time the leasehold improvement were finished, DIMINUTIVE Co. is uncertain as
to the exercise of the renewal option.
Assume that in DIMINUTIVE Co. is certain that it will exercise the renewal option. How
much is the 20x2 depreciation expense on the leasehold improvements?
a. 400,000 b. 360,000 c. 480,000 d. 440,000
Assuming ENTREAT Co. determined that the cost of the replaced part is ₱2,000,000,
how much is the loss on replacement?
a. 1,920,000 b. 1,200,000 c. 2,000,000 b. 0
B
Solution:
Jan. Accumulated depreciation (2M x 4/10) 800,000
1, Loss on replacement (squeeze) 1,200,000
20x5 Delivery equipment - aircraft (old part) 2,000,000
to derecognize the old part that is replaced
Jan. Delivery equipment - aircraft (new part) 3,200,000
1, Cash in bank 3,200,000
20x5 to recognize the new replacement part
Assuming it is impracticable to determine the cost of the replaced part, how much is the
loss on replacement?
a. 1,920,000 b. 1,200,000 c. 2,000,000 b. 0
A
Solution:
Jan. Accumulated depreciation (3.2M x 4/10) 1,280,000
1, Loss on replacement (squeeze) 1,920,000
20x5 Delivery equipment - aircraft (old part) 3,200,000
to derecognize the old part that is replaced
Jan. Delivery equipment - aircraft (new part) 3,200,000
1, Cash in bank 3,200,000
20x5 to recognize the new replacement part
Proportionate Elimination
Building 53,333,333 Accumulated Depreciation 20,000,000
Accumulated Depreciation 13,333,333 Building 20,000,000
Revaluation Surplus (40M x.70) 28,000,000 Revaluation Surplus (40M x.70) 28,000,000
Deferred tax Payable (40M x .30)12,00,000 Deferred tax Payable (40M x .30)12,00,000
2, (Piecemeal Adjustment)
A
Solution:
The depreciated replacement cost is computed as follows:
Replacement cost 140,000,000
Less: Observed depreciation (35,000,000)a
Depreciated replacement cost 105,000,000
a
Where:
Observed Accumulated depreciation
= Replacement cost x
depreciation Historical cost
35,000,000 = 140,000,000 x (20,000,000/80,000,000)
Assuming SUBTERFUGE Co. uses the proportional method, the entry to record the
revaluation includes:
a. debit to accumulated depreciation for ₱15,000,000 b. debit to accumulated
depreciation for ₱20,000,000
c. debit to building for ₱25,000,000 d. debit to building for ₱60,000,000
D
Solution:
The movements in the accounts are determined as follows:
Historical Cost Replacement cost Increase
Building 80,000,000 140,000,000 60,000,000
Accum. depreciation (20,000,000) (35,000,000) (15,000,000)
b
CA/ DRC/ RS 60,000,000 105,000,000 45,000,000
b
Carrying amount/ Depreciated replacement cost/ Revaluation surplus
Assuming SUBTERFUGE Co. uses the elimination method, the entry to record the
revaluation includes:
a. credit to accumulated depreciation for ₱20,000,000 b. a debit to building for
₱25,000,000
c. debit to accumulated depreciation for ₱15,000,000 d. a debit to deferred tax for
₱13,500,000
B
Solution:
The entry under the elimination method is as follows:
Dec. Accumulated depreciation 20,000,000
31, Building (balancing figure) 25,000,000
20x1 Revaluation surplus 31,500,000
Deferred tax liability 13,500,000
The entry under the proportional method to record the revaluation includes
a. debit to accumulated depreciation for ₱40,000,000 b. credit to accumulated
depreciation for ₱20,000,000
c. debit to building for ₱80,000,000 d. credit to building for ₱80,000,000
C
Solution:
The revaluation surplus is computed as follows:
Appraised value 200,000,000
Carrying amount (320M – 160M) (160,000,000)
Revaluation surplus – gross of tax 40,000,000
Less: Deferred tax liability (40M x 30%) (12,000,000)
Revaluation surplus after tax 28,000,000
The change in carrying amount is determined as follows:
Appraised value 200,000,000
Divide by: Carrying amount (320M – 160M) 160,000,000
Change in carrying amount 125%
The entry under the elimination method to record the revaluation includes
a. debit to accumulated depreciation for ₱40,000,000 b. debit to accumulated
depreciation for ₱20,000,000
c. debit to building for ₱80,000,000 d. credit to building for
₱80,000,000
A
Solution:
The entry under the elimination method is as follows:
Dec. Accumulated depreciation 40,000,000
31, Deferred tax liability 12,000,000
20x1 Revaluation surplus 28,000,000
A
Solution:
The depreciated replacement cost is computed as follows:
Replacement cost 140,000,000
Less: Observed depreciation (35,000,000)a
Depreciated replacement cost 105,000,000
a
Where:
Observed Accumulated depreciation
= Replacement cost x
depreciation Historical cost
Piecemeal Adjustment :
Revaluation Surplus ( 31.5M / 25) 1.26M
Deferred Tax Payable (31.5M/.7 x .30)/25 .54M
Retained Earnings 1.26M
Income Tax Payable .54M
Revaluation: Change in residual value and useful life
Use the following information for the next two questions:
On December 31, 20x1, the building of COLLOQUY CONVERSATION Co. was
revalued. Information on revaluation date is shown below:
Cost Replacement cost
Building 72,000,000 144,000,000
Accumulated depreciation 16,000,000
Residual value 8,000,000 16,000,000
Remaining useful life 10 years 12 years
Where:
Replacement cost 144,000,000 Historical cost 72,000,000
Residual value (16,000,000) Residual value (16,000,000)
Depreciable amt. of
replacement cost 128,000,000 Depreciable amount 56,000,000
20x4
Appraised value 28,000,000
Carrying amount (48,000,000)
Decrease in carrying amount (20,000,000)
Entry :
Revaluation Surplus 16,000,000
Impairment Loss 4,000,000
Land 20,000,000
20x4
Appraised value 48,000,000
Carrying amount (28,000,000)
Increase in carrying amount 20,000,000
D
Solution:
Dec. Cash on hand 6,800,000
31, Accumulated depreciation 3,200,000
20x1 Machinery 9,200,000
Gain on disposal of machinery 800,000
Additional Entry:
Revaluation Surplus 4,800,000
Retained Earnings 4,800,000
II. ACCOUNTING FOR WASTING ASSETS
2. Assuming that of the 300,000 ounces of gold extracted in 20x2, 280,000 ounces were sold and
20,000 ounces remain in inventory. How much depletion is recognized in the (a) statement of
financial position and (b) statement of profit or loss and other comprehensive income?
Statement of financial position Statement of profit or loss
a. 1,680,000 120,000
b. 116,000 1,624,000
c. 11,000 154,000
d. 120,000 1,680,000
Changes in estimates
Use the following information for the next two questions:
In 20x1, BUCOLIC Co. acquired land for a total cost of ₱40,000,000 to be used to quarry marble,
limestone, and construction aggregates. Costs incurred to obtain legal right to explore the property
amounted to ₱8,000,000. Expenditures incurred in the exploration for and evaluation of mineral resources
before technical feasibility and commercial viability of extracting a mineral resource are demonstrable
totaled ₱12,000,000. Intangible development costs of drilling, tunnels, shafts, and wells before the actual
production totaled ₱20,000,000. BUCOLIC Co. estimates that total recoverable reserves are 100,000,000
units. Furthermore, BUCOLIC Co. expects to sell the land for ₱4,800,000 after resource is depleted.
However, no buyer will pay this price unless the mine is drained, filled and leveled, a process that will cost
₱800,000. It is BUCOLIC’s policy to capitalize all exploration costs.
Actual units quarried in 20x1 through 20x4 totaled 30,000,000 units. On January 1, 20x5, BUCOLIC Co.
estimated that remaining recoverable reserves is only 25,000,000 units and after the reserves are
exhausted, the land will be sold for ₱3,200,000. Costs of disposal are estimated at ₱1,200,000. Actual
units quarried in 20x5 totaled 6,000,000 units.
4. What is the carrying amount of the wasting asset on December 31, 20x5?
a. 43,852,000 b. 44,272,000 c. 42,720,00 d. 43,952,000
5. In 20x1, INNOCUOUS HARMLESS Co. acquired land to be used to mine coal. Total costs of
acquisition, exploration, and intangible development amounted to ₱40,000,000. It was estimated that
total recoverable reserves is 50,000,000 units. Total units extracted from 20x1 through 20x4 totaled
30,000,000 units. In 20x5, after extracting 5,000,000 units, it was estimated that the remaining
recoverable reserves is 20,000,000 units. How much is the depletion charge in 20x5?
a. 3,200,000 b. 3,333,333 c. 3,266,667 d. 3,400,000
Estimated recoverable reserves from the mine are 2,100,000 units. It is estimated that 300,000 units will
be extracted each year. The heavy equipment and the drilling rig foundation have estimated useful lives
of 20 years and 10 years, respectively. Actual units extracted during 20x1 are 320,000 units.
No production in a period
Use the following information for the next two questions:
In 20x1, THRALL Co. purchased real estate containing copper for a total cost of ₱40,000,000. Immovable
tangible equipment costs for drilling rig foundation totaled ₱20,000,000. Estimated recoverable reserves
from the mine are 1,000,000 units. It is estimated that 100,000 units will be extracted each year;
therefore, the life of the mine in years is 10 years. The drilling rig foundation has an estimated useful life
of 15 years.
Actual units extracted from 20x1 through 20x3 totaled 340,000 units. No units were extracted during 20x4
due to an employee strike. Extraction resumed in 20x5 and total units extracted during that year was
80,000 units.
12. How much is the depreciation charge on the immovable tangible equipment in 20x4?
a. 980,967 b. 1,090,800 c. 1,100,000 d. 1,200,000
13. How much is depreciation charge on the immovable tangible equipment in 20x5?
a. 1,400,000 b. 1,466,667 c. 1,500,000 d. 1,600,000
Liquidating dividends
14. MYNHEER MISTER Co. has the following balances in its accounts as of December 31, 20x1:
Resource deposit – coal mine 40,000,000
Accumulated depletion 16,000,000
Ordinary share capital 80,000,000
Capital liquidated 8,000,000
Unappropriated retained earnings 20,000,000
Inventory (600,000 units) 28,000,000
Depletion rate per unit 6.00 per unit
III.
BORROWING COSTS
Specific borrowing
1. On January 1, 20x1, HOMILY Co. borrowed ₱20 million to finance the construction of a new building.
Interest is payable on the loan at 8%. Stage payments were due throughout the construction period
and therefore excess funds were invested during that period. By the end of the project on December
31, 20x1, investment income of ₱600,000 had been earned. How much is the capitalizable borrowing
cost?
a. 1,600,000 b. 1,000,000 c. 600,000 d. 0
General borrowing
2. On January 1, 20x1, ENERVATE Company had the following borrowings made for general purposes
and a part of the proceeds was used to finance the construction of a qualifying asset.
Principal
12% short-term note ₱ 40,000,000
14% bank loan (3-year) 72,000,000
16% note payable (5-year) 88,000,000
The construction of the qualifying asset was started on immediately and expenditures incurred on the
qualifying asset were as follows:
Jan. 1 ₱19,200,000
Mar. 31 8,800,000
July 30 14,000,000
October 1 21,600,000
December 31 1,200,000
Principal
12% short-term note ₱ 40,000,000
14% bank loan (3-year) 72,000,000
16% note payable (5-year) 88,000,000
The construction started on January 1 and was completed on December 20x1. The total cost of
construction was ₱72,000,000 which was incurred evenly during the year. How much is the capitalizable
borrowing cost?
a. 28,960,000 b. 5,212,800 c. 5,362,428 d. 0
The following represents the borrowings of OMNIPRESENT Co. as of December 31, 20x1.
10%, ₱28,000,000, 4-year note dated January 1, 20x1 with simple interest payable annually,
specifically borrowed to finance the construction project. Interest income earned on the temporary
investment of the proceeds is ₱480,000.
12.5%, ₱40,000,000, 10-year note dated January 1, 20x1 with interest payable annually
10%, ₱60,000,000, 10-year note dated December 31, 19x9 with interest payable annually
Date Expenditures
January 1, 20x1 4,000,000
May 1, 20x1 1,800,000
December 1, 20x1 2,880,000
Included in the January 1, 20x1 expenditures is cost of materials purchased on account for ₱400,000.
The account was settled on July 1, 20x1.
Included in the May 1, 20x1 expenditures is ₱40,000 cost of materials obtained in exchange for old
equipment.
Date Expenditures
Year 20x1
January 1, 20x1 4,000,000
May 1, 20x1 1,800,000
December 1, 20x1 2,880,000
Year 20x2
January 1, 20x2 3,600,000
August 30, 20x2 1,200,000
Year 20x3
July 1, 20x3 2,400,000
COVALESCE Co. determined the capitalization rate to be 10%. The construction of the qualifying asset
was substantially completed on September 30, 20x3.
10. How much is the total cost of the constructed qualifying asset on September 30, 20x3?
IMPAIRMENT OF ASSETS
Costs of disposal
1. On December 31, 20x1, QUIRK Co. identified that its machinery with a carrying amount of
₱4,000,000 has been impaired. In estimating the recoverable amount, QUIRK determined that the fair
value of the asset is ₱3,200,000. The following costs were also estimated:
Value in use
2. On December 31, 20x1, MASSIVE Co. identified that its building with a carrying amount of
₱2,400,000 has been impaired. In estimating the recoverable amount, MASSIVE has determined that
the fair value less costs of disposal of the asset is ₱1,600,000.
Additional information:
Each year’s estimated future cash flows include ₱40,000 representing cash outflows from future
restructuring not yet committed and ₱20,000 representing cash outflows on planned improvement and
enhancement of the asset.
Not included in the estimated future cash flows are costs of day-to-day servicing of the asset
amounting to ₱8,000 per year.
The discount rate is 10%.
If the recoverable amount of the building is ₱3,000,000, how much is the impairment loss?
a. 120,000 b. 200,000 c. 320,000 d. 0
Reallocation of goodwill
12. EXUBERANT Co. previously allocated ₱240,000 goodwill to CGU A. The goodwill allocated to CGU
A cannot be identified or associated with an asset group at a level lower than CGU A, except
arbitrarily. During the year, EXUBERANT Co. reorganizes its reporting structure such that CGU A is
divided and integrated into three other cash-generating units – CGU’s B, C and D. Additional
information is shown below:
CG Fair
U values
B 800,000
C 1,600,000
D 2,400,000
4,800,000
At the end of the year, CGU D is sold for ₱2,000,000 when its carrying amount is ₱2,320,000 excluding
allocated goodwill. How much is the gain (loss) on the sale?
a. (320,000) b. 440,000 c. (420,000) d. (440,000)
Impairment loss of CGU – no goodwill allocated
Use the following information for the next two questions:
NEGATE Co. determined that one of its cash-generating units is impaired. Information on the assets of
the CGU is shown below:
Carrying
Assets amount
Inventory 800,000
Investment property (at cost model) 1,600,000
Building 2,400,000
4,800,000
It was estimated that the value in use of the CGU is ₱3,600,000 and its fair value less costs of disposal is
₱3,200,000.
13. How much is the impairment loss?
a. 2,100,000 b. 1,600,000 c. 1,200,000 d. 1,000,000
14. How much is the carrying amount of the building after the impairment testing?
a. 1,680,000 b. 1,120,000 c. 1,860,000 d. 2,040,000
It was estimated that the value in use of the CGU is ₱3,600,000 and its fair value less costs of disposal is
₱2,400,000.
15. How much is the impairment loss?
a. 4,200,000 b. 3,200,000 c. 2,400,000 d. 2,000,000
16. How much is the carrying amount of the building after the impairment testing?
a. 1,680,000 b. 1,120,000 c. 1,860,000 d. 2,040,000
Impairment loss of CGU – Limit on allocation of impairment loss
Use the following information for the next two questions:
TRICE Co. determined that one of its cash-generating units is impaired. Information on the assets of the
CGU is shown below:
Carrying
Assets amount
Inventory 800,000
Investment property (at cost model) 1,600,000
Building 2,400,000
Goodwill 1,200,000
6,000,000
It was estimated that the value in use of the CGU is ₱3,200,000 and its fair value less costs of disposal
is ₱3,600,000.
The building’s fair value less costs of disposal is ₱2,040,000.
17. How much is the impairment loss?
a. 4,200,000 b. 3,200,000 c. 2,400,000 d. 2,000,000
18. How much is the carrying amount of the building after the impairment testing?
a. 1,680,000 b. 1,120,000 c. 1,860,000 d. 2,040,000
Case #1:
19. The budgets/forecasts approved by management reflect no commitment of management to replace
the machine. How much is the impairment loss?
a. 4,000,000 b. 200,000 c. 3,800,000 d. 0
Case #2:
20. The budgets/forecasts approved by management reflect a commitment of management to replace the
machine and sell it in the near future. Cash flows from continuing use of the machine until its disposal
are estimated to be negligible. How much is the impairment loss?
a. 4,000,000 b. 200,000 c. 3,800,000 d. 0
Carrying
Assets amount
Inventory 800,000
Investment property (at cost model) 1,600,000
Building 2,400,000
Goodwill 1,200,000
6,000,000
The recoverable amount of the CGU is ₱4,000,000, representing the CGU’s value in use. EXUBERANT
Co. excluded cash flows from financial assets and recognized liabilities when the value in use was
computed
How much is the impairment loss?
a. 3,200,000 b. 3,600,000 c. 4,000,000 d. 0
Cash 400,000
Accounts receivable 800,000
Inventory 2,000,000
Machinery – net 4,000,000
Other intangible assets 800,000
Goodwill 400,000
Accounts payable (1,200,000)
Accrued liabilities (1,600,000)
Total 5,600,000
The recoverable amount of the CGU is ₱2,400,000, representing the CGU’s value in use. INFRACTION
Co. included cash flows from financial assets and recognized liabilities when the value in use was
computed
How much is the impairment loss?
a. 3,200,000 b. 3,600,000 c. 4,000,000 d. 0
On January 1, 20x6, the building was estimated to have a recoverable amount of ₱1,600,000.
Consequently, impairment loss was recognized on that date. There was no change in the estimated
useful life.
On January 1, 20x9, the building was estimated to have a new recoverable amount of ₱2,400,000 and a
remaining useful life of 3 years. The building is measured under the cost model.
28. How much of the impairment reversal is recognized in profit or loss?
a. 160,000 b. 1,760,000 c. 1,600,000 d. 0
The appropriate discount rate was determined to be 15%. Projections of future cash flows should be
extended up to 11 years. The long-term growth rates were determined as 3%, -2%, -6%, -15%, -25% and
-67% from year 20x7 up to year 2x12.
The gross carrying amount of the CGU is ₱12,000, inclusive of ₱4,000 allocated goodwill. As of January
1, 20x2, the CGU has an accumulated depreciation of ₱668.
On December 31, 20x3, the entity estimates a revised recoverable amount of ₱7,640.
33. How much is the reversal of impairment loss to be recognized in profit or loss on December 31,
20x3?
a. 0 b. 1,588 c. 1,635 d. 1,545
NOTHING FOLLOWS