ACCTG

105: INTERMEDIATE ACCOUNTING 2

PROPERTY,
PLANT, AND
EQUIPMENT
(PPE)
By: Leomar B. Virador, CPA, MSA-MA, CMITAP

PROPERTY, PLANT, AND EQUIPMENT I 1

 DEFINITION

Tangible assets that are held for use in production or supply of

goods or services, for rental to others, or for administrative
purposes, and are expected to be used during more than one
period.

PROPERTY, PLANT, AND EQUIPMENT I 2

 EXAMPLES

• LAND
• LAND IMPROVEMENTS • FURNITURE AND FIXTURES
• BUILDING • OFFICE EQUIPMENT
• MACHINERY • PATTERNS, MOLDS, AND
• AIRCRAFT DIES
• SHIP • TOOLS
• MOTOR VEHICLE

PROPERTY, PLANT, AND EQUIPMENT I 3

 RECOGNITION

An item of property, plant and equipment shall be recognized

as an asset when:

• It is probable that future economic benefits associated

with the asset will flow to the entity.
• The cost of the asset can be measured reliably.

PROPERTY, PLANT, AND EQUIPMENT I 4

 MEASUREMENT
Initial recognition

An item of property, plant, and equipment that qualifies for

recognition as an asset shall be measured at COST. Cost is the
amount of cash or cash equivalent paid and the fair value of
the other consideration given to acquire an asset at the time of
acquisition or construction.

PROPERTY, PLANT, AND EQUIPMENT I 5

 MEASUREMENT
Elements of cost
TAX
• Purchase price, including import duties and nonrefundable
purchase taxes, after deducting trade discounts and
rebates. return win's portion cash
e.g g
• Cost directly attributable to bringing asset to the location
Fritt and condition necessary for it to be capable for operating
in the manner intended by management
• Initial estimate of the cost of dismantling and removing
the item and restoring the site on which it is located, the
III obligation for which an entity incurs. PROPERTY, PLANT, AND EQUIPMENT I 6
 MEASUREMENT
Subsequent measurement

After initial recognition, an entity shall choose either the cost

model or revaluation model as the accounting policy for
property, plant, and equipment.
• Under the cost model, property, plant, and equipment are
carried at cost less any accumulated depreciation and any
accumulated impairment loss.
loss
Cost Accpep Acc Imp
loans PROPERTY, PLANT, AND EQUIPMENT I 7
 MEASUREMENT
Subsequent measurement

After initial recognition, an entity shall choose either the cost

model or revaluation model as the accounting policy for
property, plant, and equipment.
• Under the revaluation model, property, plant, and
equipment are carried at a revalued amount, being the fair
value at the date of revaluation less any subsequent
accumulated depreciation and subsequent accumulated
impairment loss. AccDep AccImp
toss
Fu PROPERTY, PLANT, AND EQUIPMENT I 8
 to know the cost
en dit
debit
1 Cash basis
2 On account with cash discount
3 Installment basis
Issuance of share capital
4
WAYS OF
Issuance of bonds payable
5
ACQUIRING
6 Exchange PPE.
7 Donation
8 Government grant
9 Construction
PROPERTY, PLANT, AND EQUIPMENT I 9
 MEASUREMENT
Cash basis

The cost of an item of property, plant, and equipment is the

cash price equivalent at the recognition date. The cost of asset
acquired on a cash basis includes the cash paid plus directly
attributable costs.

PROPERTY, PLANT, AND EQUIPMENT I 10

 MEASUREMENT
Cash basis

ILLUSTRATION:

Mang Efraim acquired a delivery equipment costing P75,000.

Mang Efraim also paid P1,000 in freight costs and installation
costs amounting to P4,000. At what cost will the equipment be
recorded?
80K
PROPERTY, PLANT, AND EQUIPMENT I 11
 MEASUREMENT
Cash basis

ILLUSTRATION:

Nang Sheena acquired land and building at a single cost of

P6,000,000. At the time of acquisition, the land has a fair value
of P3,000,000 and the building, P2,000,000. At what cost will
the land and building be recorded?
cash bars
Not to if by
PROPERTY, PLANT, AND EQUIPMENT I 112
 MEASUREMENT
Cash basis

ILLUSTRATION:

Ryan Victor Company made the following individual cash purchases:

Land and building P6,000,000 Land lism you
4 om
4.5M am Bldg
Machinery and equipment 1,800,000 Bldg M MM m cook t von
E
Delivery equipment 500,000 any DE took
cash 8.3M
An appraisal disclosed the following fair value:
Land P1,000,000; Building 3,000,000; Machinery 800,000; Office
equipment 400,000; Delivery equipment 350,000
Prepare the entry to record the purchase. PROPERTY, PLANT, AND EQUIPMENT I 13
 MEASUREMENT
On account with cash discount

When an asset is acquired on account subject to a cash

discount, the cost of the asset is equal to the invoice price
minus the discount. regardless whether or not
of
the discount is taken
Discounted
Price
PROPERTY, PLANT, AND EQUIPMENT I 14
 MEASUREMENT
On account with cash discount

ILLUSTRATION:

Jerick Co. purchased an office table for P36,000, 1/10, n/30. At what
cost will the furniture and fixture be recorded?

Igf 36k WTAM DISC

Igp 36640
304 Alp zuk
Atp
wittinsc Purchase 300
CASA 36k
AP 36K
360
35640 FEE
CASH PROPERTY, PLANT, AND EQUIPMENT I 15

FIT 360
 MEASUREMENT
On account with cash discount

ILLUSTRATION:

Ryan De Company acquired a machine with an invoice price of

P3,000,000 subject to a cash discount of 10% which was not taken.
Compute the amount to be recorded for the machine.
Machine is still at Discounted price regardless if
M
taken or not 2.7
PROPERTY, PLANT, AND EQUIPMENT I 16
 ASSET
op
Disc onNIP I'Thortizy
WIP

MEASUREMENT
On installment basis

payment Is
MP
CAS H
W
When payment for item of property, plant and equipment is
daydeferred beyond normal credit terms, the cost is the cash price
equivalent.
The excess of the installment price over the cash price is
treated as an interest to be amortized over the credit period.
mommMMEnest XX Te
EXP
PROPERTY, PLANT, AND EQUIPMENT I 17
DISC ON NIP XX
NO AVAILABLE CASH PRICE

Down ÉÉÉcost I
Payment PV m

MP PV Implied interest
cash phones
series of equal
army
re not equal Seamount
Int
FA Imp
PV
I
A
HIIIII TO BE
Amounod
Mr Momo
n DEFAME
sa
ti

PU DISC
ASSET FA PV
on NIP II
DISC
FA
W p
casa Disc

PREPAL
PU
DATE PAYMENT INT
 MEASUREMENT
On installment basis

ILLUSTRATION: ddd INTEREST

WITH CASHPRICE price LII EXPENSE
CAMMTED Disc on Nlp
Ppe CASH pay
A machinery is purchased at an installment price of P450,000.
The terms are P50,000 down and the balance payable in four
equal annual installments. The cash price of the machinery is
P300,000. A promissory note is issued for the installment
balance. At what amount will the machinery be recorded?
Machines W
Panty per quote
Zayn
Disc NLP o PROPERTY, PLANT, AND EQUIPMENT I 18
Nlp ok gook
 IF NO CASH PRICE
PPE PRESENTTAME

MEASUREMENT
On installment basis

ILLUSTRATION:
On January 1, 2019, Potchi Company purchased a machine under the
following terms:
1. P100,000 downpayment
2. Four annual payments of P200,000, the first installment note to be
paid on December 31, 2019. The fair value of the machine is not
clearly determinable on the date of acquisition. The prevailing rate
of interest for this type of note is 10%.
Prepare the journal entries for 2020 and 2021.
PROPERTY, PLANT, AND EQUIPMENT I 19
NO AVAILABLE CASH PRICE

Down ÉÉÉcost l
payment PV N M

NP Pu Implied interest
k
17
PV factor 3 pay cut a

machine 734k y 634k

son via GUk 370.6K
pise on NIP Uk 1219 Wh 133 54
rook non z our
NIP look
my 13354
n
cash in n
Cash cook n W
n
Dee 2019 not
Mp w B n
Int Exp
pose on NIP
 Emmett
SHARECARNAL

MEASUREMENT
Issuance of share capital

Where a property is acquired through the issuance of

share capital, the property shall be measured at an amount
equal to the following in the order of priority:
a. Fair value of the property received
b. Fair value of the share capital
c. Par value or stated value of the share capital
PROPERTY, PLANT, AND EQUIPMENT I 20
 MEASUREMENT
Issuance of share capital

ILLUSTRATION:

A piece of land is acquired by issuing 15,000 shares with par

value P60. At the time of acquisition, the fair value of the land is
P1,500,000. At what amount will the land be recorded?

1 am
Lapd
PROPERTY, PLANT, AND EQUIPMENT I 21
 MEASUREMENT
Issuance of share capital

ILLUSTRATION:

A piece of land is acquired by issuing 15,000 shares with par

value P60. At the time of acquisition, the fair value of the land is
not available but the share is quoted at P80 per share. At what
amount will the land be recorded?

1.2M
Land 80 Fu
shams x
15k PROPERTY, PLANT, AND EQUIPMENT I 22
 MEASUREMENT
Issuance of share capital

ILLUSTRATION:

A piece of land is acquired by issuing 15,000 shares with par

value P60. At the time of acquisition, the fair value of the land
nor the shares is not available. At what amount will the land be
recorded?

hook
Land
PROPERTY, PLANT, AND EQUIPMENT I 23
 MEASUREMENT
Issuance of bonds payable

LONG TERM
When an entity acquires an asset by issuing bonds
payable, standard provides that the asset acquired is
measured in the following order:
a. Fair value of bonds payable
b. Fair value of asset received
c. Face amount of bonds payable
PROPERTY, PLANT, AND EQUIPMENT I 24
 MEASUREMENT
Issuance of 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 P5,800,000. At what amount will the building be recorded?

5.8M
Bldg
PROPERTY, PLANT, AND EQUIPMENT I 25
 MEASUREMENT
Issuance of 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
cannot be determined. At what amount will the building be
recorded?
GM
Bldg
PROPERTY, PLANT, AND EQUIPMENT I 26
 MEASUREMENT
Issuance of 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 and the bonds cannot be determined. At what
amount will the building be recorded?

5M
Bldg
PROPERTY, PLANT, AND EQUIPMENT I 27
 MEASUREMENT
Exchange

The measurement of an item of property, plant and equipment

acquired in an exchange depends on whether the exchange
transaction lacks commercial substance or not.
An exchange has commercial substance when cash flows of the
asset received differ significantly from the cash flows of the
asset transferred.
PROPERTY, PLANT, AND EQUIPMENT I 28
 MEASUREMENT
Exchange: With Commercial Substance

NO CASH INVOLVED
If a property is acquired in an exchange with commercial
substance and there is no cash involved, the asset is measured
at the following in the order of priority:
a. Fair value of property given
b. Fair value of property received
c. Carrying amount of property given PROPERTY, PLANT, AND EQUIPMENT I 29
 MEASUREMENT
Exchange: With Commercial Substance

EQUIP 530k th F 530k

ILLUSTRATION: CA F F
AccDED 120k
Furniture y GAIN 44ft
GAINON EXCHANGE 50K
A piece of furniture with cost of P600,000 and accumulated
depreciation of P120,000 is exchanged for an equipment with a
fair value of P550,000. At the time of exchange, the furniture
has a fair value of P530,000.

Prepare the journal entry to record the transaction.

PROPERTY, PLANT, AND EQUIPMENT I 30
 MEASUREMENT
Exchange: With Commercial Substance
EQUIP 550 K
ILLUSTRATION:
ACC DEP 120 K
FURNITURE Cook
GAINON Ex 7 ok
A piece of furniture with cost of P600,000 and accumulated
depreciation of P120,000 is exchanged for an equipment with a
fair value of P550,000. At the time of exchange, the fair value of
the furniture cannot be determined.

Prepare the journal entry to record the transaction.

PROPERTY, PLANT, AND EQUIPMENT I 31
 MEASUREMENT
Exchange: With Commercial Substance

ILLUSTRATION: EQUIPMENT 48012

Acc DEP 120 K
Cook
Ermine
A piece of furniture with cost of P600,000 and accumulated
depreciation of P120,000 is exchanged for an equipment. At the
time of exchange, the fair value of the furniture and the
equipment cannot be determined.

Prepare the journal entry to record the transaction.

PROPERTY, PLANT, AND EQUIPMENT I 32
 PAYEE

Landgiven to landgun Fu
cathpaid cashreceived
MEASUREMENT
Exchange: With Commercial Substance

WITH CASH INVOLVED

If a property is acquired in an exchange with commercial
substance and there is cash involved, the asset is measured at:
a. fair value of property given plus cash payment – on the part
of the payor
b. fair value of property given minus cash received – on the
part of the recipient FVgPPEreceived payment
cash
PROPERTY, PLANT, AND EQUIPMENT I 33
 Sook
K EQUIP m
All REP 2 UM
A EdmP Gorr
GAINONEx
MEASUREMENT
Exchange: With Commercial Substance

ILLUSTRATION:

Haidee Company exchanged used equipment for another equipment of

KaCa Company. The following information pertains to the exchange:
Haidee KaCa
Equipment P2,400,000 P2,200,000
Accumulated depreciation 2,000,000 1,750,000
Fair value 600,000 800,000
Cash paid 200,000

Prepare the necessary journal entries.

PROPERTY, PLANT, AND EQUIPMENT I 34
 MEASUREMENT
Exchange: No Commercial Substance

If a property is acquired in an exchange without commercial

substance, the asset is measured at the carrying amount of the
asset given. If any cash is given, it shall be added to the carrying
amount of the asset given on the part of the payor and
deducted from the carrying amount on the part of the recipient.

CAI cash PROPERTY, PLANT, AND EQUIPMENT I 35

 Took FU JEONP book
B Equip CA J EomP Took
Acc pep Cook
loss on Ex no K
J Equip 1.6M
Cash
took
MEASUREMENT
Exchange: No Commercial Substance

ILLUSTRATION:

John acquired a piece of equipment from Biker through an exchange. The

following data were available:
John Biker
Equipment P1,600,000 P2,000,000
Accumulated depreciation 900,000 1,350,000
Fair value 600,000 800,000
Cash paid 200,000

Prepare the necessary journal entries.

PROPERTY, PLANT, AND EQUIPMENT I 36
 MEASUREMENT
Trade-in

Trade-in involves a non-dealer acquiring asset from a dealer.

Trade-in usually involves significant amount of cash and hence
contains 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

PROPERTY, PLANT, AND EQUIPMENT I 37

 MEASUREMENT
Trade-in

ILLUSTRATION:

An entity traded an old equipment with a dealer for a newer model.

Old equipment:
Cost P 1,400,000
Accumulated depreciation 1,000,000
Fair value 350,000
Trade in value 500,000
New equipment:
List price 2,000,000
Trade in value of old asset (500,000)
Cash payment 1,000,000 PROPERTY, PLANT, AND EQUIPMENT I 38
 PV 350K
NE 1 TM
YOK
CA
Fut cashPayout
ACC DEP IM loss TR
on TI 50hL
loss

OE 1.4M
cash IM
 IF NON SHAREHOLDER Donation
MASMIDATERECOGNIZED ALELTTHEN Income
TRANSFERRED
IF went condition RECOGNIZED AS
TO INCOME

MEASUREMENT
Donation

• Contributions received from shareholders shall be recorded at the fair

value with the credit going to donated capital.

• Expenses incurred in connection with the donation, like payment of

registration fees and legal fees shall be charged to the donated capital
account.

• Directly attributable costs incurred subsequently, such as installation costs

necessary to bring the donated asset to the location and condition for the
intended use shall be capitalized.

DR PFE CR INCOME From Donation PROPERTY, PLANT, AND EQUIPMENT I 39

 MEASUREMENT
Construction

The cost of self-constructed property, plant and equipment shall include:

1. Direct cost of materials
2. Direct cost of labor SUPERVISOR SALARY
3. Indirect cost and incremental overhead specifically identifiable or
traceable to the construction. D WATER ELECTRICITY

PROPERTY, PLANT, AND EQUIPMENT I 40

 2IIII.si FIIsmna.m ime

RENT LESSER DEP EXP

INTERVENING OPERATIONS
tartstatement
vacant lot
ex car
park
 DERECOGNITION

• Derecognition means that the cost of the property, plant and equipment
together with the related accumulated depreciation shall be removed
from the accounts.
• An item of PPE is derecognized when no future economic benefits are
expected from the use.

ACC DED XX
X
ASSET
PROPERTY, PLANT, AND EQUIPMENT I 41
 DERECOGNITION

• The gain or loss from the derecognition of an item of property, plant and
equipment shall be included in profit or loss.
• Such gain or loss shall be determined as the difference between the net
disposal proceeds and the carrying amount of the item.

PROPERTY, PLANT, AND EQUIPMENT I 42

 FULLY DEPRECIATED
PROPERTY
• When the carrying amount is equal to zero or the carrying amount is
equal to the residual value. In such a case, the account and related
accumulated depreciation account are closed and the residual value is
set up in a separate account.
• The cost of fully depreciated asset remaining in service and the related
accumulated depreciation ordinarily shall not be removed from the
accounts RESIDUAL VALUE E DEPRECIABLE AMT
Cost
PROPERTY, PLANT, AND EQUIPMENT I 43
 HELD FOR SALE

• An item of PPE is classified as “held for sale” if the asset is available for
immediate sale in the present condition within one year from the date
of classification.
• Such an asset shall be accounted separately as a current asset.

BALANCE SHEET
CURRENT ASSET
CURRENT ASSET HELD FOR SALE
NON
PROPERTY, PLANT, AND EQUIPMENT I 44
 HELD FOR SALE

• Such an item shall be measured at the lower of carrying amount or fair

value less cost of disposal.
• Any write-down from carrying amount to fair value less cost of disposal
shall be treated as impairment loss
• It shall not be subject to depreciation.

RV
LCN
PROPERTY, PLANT, AND EQUIPMENT I 45
 OPTIONAL
DISCLOSURES
Entities are encouraged to disclose the following information
may prove relevant to the needs of financial statement users:
ØThe carrying amount of temporarily idle property, plant and equipment
ØThe gross carrying amount of any fully depreciated property, pant and equipment
still in use
ØThe carrying amount of property, plant and equipment retired from active use and
classified as held for sale
ØWhen the cost model is used, the fair value of property, plant and equipment when
this is materially different from the carrying amount.
PROPERTY, PLANT, AND EQUIPMENT I 46
 END OF CHAPTER 1

Thank you!
PROPERTY, PLANT, AND EQUIPMENT I 47