PROPERTY, PLANT AND EQUIPMENT

2020-SPN PART 1 AiRnotes

Summary of IAS 16

Objective of IAS 16
The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. The
principal issues are the recognition of assets, the determination of their carrying amounts, and the
depreciation charges and impairment losses to be recognized in relation to them.

Scope
IAS 16 applies to the accounting for property, plant and equipment, except where another standard
requires or permits differing accounting treatments, for example:

 assets classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations
 biological assets related to agricultural activity accounted for under IAS 41 Agriculture exploration and
evaluation assets recognized in accordance with IFRS 6 Exploration for and Evaluation of Mineral
Resources
 mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.

The standard does apply to property, plant, and equipment used to develop or maintain the last three
categories of assets. [IAS 16.3]

The cost model in IAS 16 also applies to investment property accounted for using the cost model
under IAS 40 Investment Property. [IAS 16.5]

The standard does apply to bearer plants but it does not apply to the produce on bearer plants. [IAS 16.3]

Note: Bearer plants were brought into the scope of IAS 16 by Agriculture: Bearer Plants (Amendments to
IAS 16 and IAS 41), which applies to annual periods beginning on or after 1 January 2016.

Recognition
Items of property, plant, and equipment should be recognized as assets when it is probable that: [IAS 16.7]
 It is probable that the future economic benefits associated with the asset will flow to the entity,
and
 The cost of the asset can be measured reliably.

This recognition principle is applied to all property, plant, and equipment costs at the time they are
incurred. These costs include costs incurred initially to acquire or construct an item of property, plant and
equipment and costs incurred subsequently to add to, replace part of, or service it.

IAS 16 does not prescribe the unit of measure for recognition – what constitutes an item of property, plant,
and equipment. [IAS 16.9] Note, however, that if the cost model is used (see below) each part of an item
of property, plant, and equipment with a cost that is significant in relation to the total cost of the item must
be depreciated separately. [IAS 16.43]

IAS 16 recognizes that parts of some items of property, plant, and equipment may require replacement at
regular intervals. The carrying amount of an item of property, plant, and equipment will include the cost of
replacing the part of such an item when that cost is incurred if the recognition criteria (future benefits and
measurement reliability) are met. The carrying amount of those parts that are replaced is derecognized in
accordance with the derecognition provisions of IAS 16.67-72. [IAS 16.13]

Also, continued operation of an item of property, plant, and equipment (for example, an aircraft) may
require regular major inspections for faults regardless of whether parts of the item are replaced. When
each major inspection is performed, its cost is recognized in the carrying amount of the item of property,
plant, and equipment as a replacement if the recognition criteria are satisfied. If necessary, the estimated
cost of a future similar inspection may be used as an indication of what the cost of the existing inspection
component was when the item was acquired or constructed. [IAS 16.14]

Initial measurement
An item of property, plant and equipment should initially be recorded at cost. [IAS 16.15] Cost includes all
costs necessary to bring the asset to working condition for its intended use. This would include not only its
original purchase price but also costs of site preparation, delivery and handling, installation, related
professional fees for architects and engineers, and the estimated cost of dismantling and removing the
asset and restoring the site (see IAS 37 Provisions, Contingent Liabilities and Contingent Assets). [IAS 16.16-
17]

Albert I. Rivera, CPA, MBA, CRA 1 of 13

PROPERTY, PLANT AND EQUIPMENT
2020-SPN PART 1 AiRnotes

If payment for an item of property, plant, and equipment is deferred, interest at a market rate must be
recognized or imputed. [IAS 16.23]

If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature), the cost will
be measured at the fair value unless (a) the exchange transaction lacks commercial substance or (b) the
fair value of neither the asset received nor the asset given up is reliably measurable. If the acquired item is
not measured at fair value, its cost is measured at the carrying amount of the asset given up. [IAS 16.24]

Measurement subsequent to initial recognition

IAS 16 permits two accounting models:
 Cost model. The asset is carried at cost less accumulated depreciation and impairment. [IAS 16.30]
 Revaluation model. The asset is carried at a revalued amount, being its fair value at the date of
revaluation less subsequent depreciation and impairment, provided that fair value can be
measured reliably. [IAS 16.31]

The revaluation model

 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).
 If a revaluation results in an increase in value, it should be credited to other comprehensive income
and accumulated in equity under the heading "revaluation surplus" unless it represents the reversal
of a revaluation decrease of the same asset previously recognized as an expense, in which case it
should be recognized in profit or loss. [IAS 16.39]
 A decrease arising as a result of a revaluation should be recognized as an expense to the extent
that it exceeds any amount previously credited to the revaluation surplus relating to the same
asset. [IAS 16.40]
 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]

Depreciation (cost and revaluation models)

For all depreciable assets:

 The depreciable amount (cost less residual value) should be allocated on a systematic basis over
the asset's useful life [IAS 16.50].
 The residual value and the useful life of an asset should be reviewed at least at each financial year-
end and, if expectations differ from previous estimates, any change is accounted for prospectively
as a change in estimate under IAS 8. [IAS 16.51]
 The depreciation method used should reflect the pattern in which the asset's economic benefits
are consumed by the entity [IAS 16.60]; a depreciation method that is based on revenue that is
generated by an activity that includes the use of an asset is not appropriate. [IAS 16.62A]
Note: The clarification regarding the revenue-based depreciation method was introduced
by Clarification of Acceptable Methods of Depreciation and Amortization, which applies to annual
periods beginning on or after 1 January 2016.
 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 Amortization, which applies to annual periods
beginning on or after 1 January 2016.
 Depreciation should be charged to profit or loss, unless it is included in the carrying amount of
another asset [IAS 16.48].
 Depreciation begins when the asset is available for use and continues until the asset is
derecognized, even if it is idle. [IAS 16.55]

Recoverability of the carrying amount

 IAS 16 Property, Plant and Equipment requires impairment testing and, if necessary, recognition
for property, plant, and equipment. An item of property, plant, or equipment shall not be carried

Albert I. Rivera, CPA, MBA, CRA 2 of 13

PROPERTY, PLANT AND EQUIPMENT
2020-SPN PART 1 AiRnotes

at more than recoverable amount. Recoverable amount is the higher of an asset's fair value less
costs to sell and its value in use.
 Any claim for compensation from third parties for impairment is included in profit or loss when the
claim becomes receivable. [IAS 16.65]

Derecognition (retirements and disposals)

 An asset should be removed from the statement of financial position on disposal or when it is
withdrawn from use and no future economic benefits are expected from its disposal. The gain or
loss on disposal is the difference between the proceeds and the carrying amount and should be
recognized in profit and loss. [IAS 16.67-71]
 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
Information about each class of property, plant and equipment
a. For each class of property, plant, and equipment, disclose: [IAS 16.73]
 basis for measuring carrying amount
 depreciation method(s) used
 useful lives or depreciation rates
 gross carrying amount and accumulated depreciation and impairment losses
 reconciliation of the carrying amount at the beginning and the end of the period, showing:
 additions
 disposals
 acquisitions through business combinations
 revaluation increases or decreases
 impairment losses
 reversals of impairment losses
 depreciation
 net foreign exchange differences on translation
 other movements
Additional disclosures
The following disclosures are also required: [IAS 16.74]
 restrictions on title and items pledged as security for liabilities
 expenditures to construct property, plant, and equipment during the period
 contractual commitments to acquire property, plant, and equipment
 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 require, a number of additional disclosures. [IAS 16.79]

Revalued property, plant and equipment

1. If property, plant, and equipment is stated at revalued amounts, certain additional disclosures are
required: [IAS 16.77]
 the effective date of the revaluation
 whether an independent valuer was involved
 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
2. Entities with property, plant and equipment stated at revalued amounts are also required to make
disclosures under IFRS 13 Fair Value Measurement.

Summary of IFRIC 20
Background
 In surface mining operations, entities may find it necessary to remove mine waste materials
('overburden') to gain access to mineral ore deposits. This waste removal activity is known as
'stripping'. There can be two benefits accruing to the entity from the stripping activity: usable ore
that can be used to produce inventory and improved access to further quantities of material that
will be mined in future periods.
 IFRIC 20 considers when and how to account separately for these two benefits arising from the
stripping activity, as well as how to measure these benefits both initially and subsequently.
 IFRIC 20 only deals with waste removal costs that are incurred in surface mining activity during the
production phase of the mine ('production stripping costs').

Albert I. Rivera, CPA, MBA, CRA 3 of 13

PROPERTY, PLANT AND EQUIPMENT
2020-SPN PART 1 AiRnotes

Overview of requirements
IFRIC 20 requires:
 The costs of stripping activity to be accounted for in accordance with the principles of IAS
2 Inventories to the extent that the benefit from the stripping activity is realized in the form of
inventory produced
 The costs of stripping activity which provides a benefit in the form of improved access to ore is
recognized as a non-current 'stripping activity asset' where the following criteria are met:
 it is probable that the future economic benefit (improved access to the ore body) associated
with the stripping activity will flow to the entity
 the entity can identify the component of the ore body for which access has been improved
 the costs relating to the stripping activity associated with that component can be measured
reliably
 When the costs of the stripping activity asset and the inventory produced are not separately
identifiable, production stripping costs are allocated between the inventory produced and the
stripping activity asset by using an allocation basis that is based on a relevant production measure
 A stripping activity asset is accounted for as an addition to, or as an enhancement of, an existing
asset and classified as tangible or intangible according to the nature of the existing asset of which
it forms part
 A stripping activity asset is initially measured at cost and subsequently carried at cost or its revalued
amount less depreciation or amortization and impairment losses
 A stripping activity asset is depreciated or amortized on a systematic basis, over the expected useful
life of the identified component of the ore body that becomes more accessible as a result of the
stripping activity. The units of production method is used unless another method is more
appropriate.
Summary of SIC-6
 The issue is how to account for expenditures such as those for modifications necessary to prepare
existing software systems for the turn of the millennium (often referred to as "Year 2000 Costs")
or the introduction of the euro.
 In accordance with paragraphs 89 and 90 of the Framework (and applying IAS 16.24 by analogy)
expenditure incurred to restore or maintain the future economic benefits that an enterprise
expected from the original standard of performance of existing software systems should not be
capitalized. This solution is consistent with IAS 38 Intangible Assets as well.
 In addition, expenditure should be recognized as incurred in accordance with paragraphs 94-98 of
the Framework that is, for work undertaken "in house", as materials are used or labor time is
consumed. For work undertaken by external contractors, expenditure should be recognized only
as the work is carried out.
 The Interpretation does not apply to software purchased
Summary of SIC-14
 SIC-14 addresses how an enterprise should account for impairments or losses of items of property,
plant and equipment, the related compensation from third parties, and the subsequent
restoration, purchase or construction of assets.
 SIC-14 confirms that three separate economic events are involved and that each event should be
accounted for separately. The three separate events are:
 the impairment or loss,
 the related compensation from third parties, and
 the subsequent restoration, purchase or construction of assets.
 Therefore, if a fixed asset is impaired or lost, any claim for compensation from a third party
or any subsequent cost of repair or acquisition of a replacement asset are separate
economic events and should be accounted for separately. Impairments should be
recognized under IAS 36 Impairment of Assets. Monetary or non-monetary compensation
from third parties (insurance companies, governments, or lawsuits) should be included in
the income statement when it probable and measurable. Compensation that is contingent
on the occurrence of some future event, such as winning a lawsuit, must be virtually certain
before it can be recognized. The cost of a replacement asset would normally be capitalized.
Restoration cost would be capitalized only if increases the performance capability of the
asset.

Summary of SIC-23
1. SIC-23 confirms that the cost of a major inspection or overhaul generally should be expensed as
incurred. The exception is where the enterprise treats the cost of a major inspection or overhaul
as a separate "component" asset for accounting purposes and depreciates that component to
reflect the consumption of benefits resulting from the major inspection or overhaul.

Albert I. Rivera, CPA, MBA, CRA 4 of 13

PROPERTY, PLANT AND EQUIPMENT
2020-SPN PART 1 AiRnotes

Property, Plant and Equipment

PPE are tangible items that:
1. are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and
2. are expected to be used during more than 1 period.

PPE include bearer plant – a living plant that:

1. is used in the production of supply of agricultural produce;
2. is expected to bear produce for more than one period; and
3. has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales

Under PAS 40, other term for PPE is owner occupied property

Initial Recognition
PPE should be recognized as assets when it is probable that:
1. future economic benefits associated with the asset will flow to the enterprise; and
2. cost of asset can be measured reliably

Initial Measurement – at cost

Components of cost:
1. Purchase price less trade discounts/rebates
2. Import duties
3. Non-refundable/non-recoverable purchase taxes
4. Any cost directly attributable in bringing the asset to working condition for its intended use

Cost directly attributable in bringing the asset to working condition for its intended use
1. Testing Cost less net proceeds from disposal of samples generated during testing
2. Site preparation cost
3. Employee benefits cost arising directly from construction/acquisition of PPE
4. Professional fees
5. Installation/assembly cost
6. Initial delivery and handling cost
7. Estimated cost of dismantlement, removal and site restoration cost – asset retirement obligation

Recognition Issues

1. Spare parts, standby and servicing equipment

Spare parts, standby and servicing equipment Accounting Treatment

a. To be sold by the company Inventory (consumable stores)
b. Spare parts and servicing equipment Spare parts and servicing equipment that
support PPE can be treated as:
a. PPE – if expected to be used for more
than 1 period; otherwise
b. Inventory (consumable stores)
c. Major spare parts, standby equipment and a. PPE – if expected to be used for more
servicing equipment than 1 period; otherwise
b. Inventory

2. Safety and environmental Equipment – PPE

Cost of MACHINERY/EQUIPMENT when purchased

1. Purchase price
2. Import duties
3. Non-recoverable/non-refundable taxes
4. Freight/handling cost/insurance/storage/unloading charge and other cost directly attributable to
acquisition e.g. broker’s commission
5. Installation/assembly cost
6. Testing/trial cost
7. Professional fees
8. Construction cost of base (foundation or platform)
9. Estimated cost of dismantlement, removal and site restoration cost – asset retirement obligation

Albert I. Rivera, CPA, MBA, CRA 5 of 13

PROPERTY, PLANT AND EQUIPMENT
2020-SPN PART 1 AiRnotes

Old and New installation cost

Undepreciated old instalment
Scenario New Instalment Cost
cost
1. Machinery is moved to new
Expensed Capitalized
location
2. Machinery is moved and Expensed
Capitalized
retired Removal Cost - Expensed

Royalty payment on machines

Royalty Payments Accounting Treatment
1. Based on units produced Manufacturing Overhead
2. Based on units produced
Selling Expense
and sold
Cost chargeable to LAND
1. Purchase price (including other necessary cost e.g. commissions to brokers/agents)
2. Survey cost
3. Cost to register/transferring the title in the name of buyer
4. Closing cost (e.g. legal fees, titling cost and recording fees)
5. Clearing Cost less proceeds from salvage value excluding demolition cost
6. Liabilities assumed by buyer (e.g. mortgages/ encumbrances including interest)
7. Unpaid real property taxes prior to acquisition (taxes incurred after date of acquisition – expense)
8. Payments to tenants to vacate the premises including relocation cost/ reconstruction cost of
property to others occupying the land
9. Option cost on land acquired (option price on land NOT acquired – expense)
10. Permanent improvements that have indefinite useful life (e.g. draining cost, cost of filling the
land, cost of grading/leveling, clearing, surveying and subdividing)
11. Special assessment – government-maintained improvements
12. Estimated restoration cost
Special Notes
1. Land Improvements
Land Improvements Examples Accounting Treatment
a. Not subject to depreciation Cost of surveying, clearing, Capitalizable cost of land
grading and levelling,
subdividing
b. Depreciable Fences, water systems, drainage a. If part of blueprint of
systems, side-walks and building – capitalizable
pavements, landscaping cost of BUILDING
b. If not part of the blueprint
– LAND IMPROVEMENTS

2. Land Account
Items Accounting Treatment
a. Land used as plant site PPE
b. Land held for a currently undetermined purpose Investment Property
c. Land held for long-term capital appreciation Investment Property
d. Land held as site for a building being constructed or
Investment Property
developed for future use as investment property
e. Land leased out under operating lease Investment Property
f. Land leased out under finance lease Not reported in the books of the company
g. Land held definitely as a future land site PPE
h. Land held for sale in the ordinary course of business Inventory
i. Land held for sale under PFRS 5 Non-current asset held for sale
j. Land related to agricultural activity Investment property or PPE
Cost chargeable to BUILDING when PURCHASED
1. Purchase price (including other necessary cost e.g. commissions to brokers/agents)
2. Legal fees and other expenses incurred in connection with the purchase
3. Liabilities assumed by buyer (e.g. mortgages/ encumbrances including interest)
4. Unpaid real property taxes prior to acquisition (taxes incurred after date of acquisition – expense)
5. Payments to tenants to vacate the premises
6. Option cost on building acquired (option price on building NOT acquired – expense)
7. Renovation and remodeling cost – to make it suitable for its intended use (repairs & maintenance
after occupancy – expense)

Albert I. Rivera, CPA, MBA, CRA 6 of 13

PROPERTY, PLANT AND EQUIPMENT
2020-SPN PART 1 AiRnotes

Cost chargeable to BUILDING when CONSTRUCTED (Self-constructed Building)

1. Construction cost (materials, labor and overhead)
2. Building permit & license
3. Architect fee
4. Supervision cost
5. Excavation cost
6. Expenditures for service equipment and fixtures that made permanent part of the structure
7. Borrowing cost and insurance
8. Cost of temporary structures during construction (e.g. security fences, construction offices,
sleeping quarters for laborers, materials and tools shed, etc.)
9. Depreciable improvements which are part of blueprint (e.g. fences, water systems, drainage
systems, side-walks and pavements, landscaping)
Special Notes:
1. Cost not included in self-constructed building:
a. Savings or loss on construction – not recognized
b. Cost of abnormal amounts of wasted materials, labor or other resources due to inefficiencies
– expense
c. Cost of uninsured hazards/uninsured accidents – expense
2. Building fixtures
a. Immovable – capitalized cost to building
b. Movable – charged to furniture & fixtures and depreciated over their useful life
3. Building Account
Items Accounting Treatment
a. Building used as plant site PPE
b. Building being constructed or developed for future use
Investment Property
as investment property
c. Building leased out under operating lease Investment Property
d. Building leased out under finance lease Not reported in the books of the company
e. Building held for sale in the ordinary course of
Inventory
business
f. Building held for sale under PFRS 5 Non-current asset held for sale

Acquisition of LAND and BUILDING

1. The cost of property should be allocated to land and building based on their relative fair values
2. Purchase price, common cost, demolition cost:
Scenario Purchase Price Common Cost Demolition Cost
a. Old building is Charge entirely to Charge to land Charge to new
unusable and likely land building net of
to be demolished salvage value
right away (i.e. FV
of building is
insignificant)
b. Old building is Allocated to Land and Allocated to Land and Charge to new
usable but likely to Building based on Building based on building net of
be demolished relative FV (allocated relative FV (allocated salvage value
right away cost of building is cost of building is
charge to loss) charge to loss)
c. Old building is usable and old building is classified as:
a. PPE Allocated to Land and Allocated to Land and Charge to new
Building based on Building based on building net of
relative FV relative FV salvage value
b. Inventory Land & Building will Added cost of Added cost of
be classified as inventory inventory net of
Inventory salvage value
c. Investment Land & Building will Allocated to Land and Charge to new
property @ be classified into 2 Building based on building net of
cost model items: relative FV salvage value as
a. Investment Investment Property
property
(Building) – at
allocated cost
based on relative
FV

Albert I. Rivera, CPA, MBA, CRA 7 of 13

PROPERTY, PLANT AND EQUIPMENT
2020-SPN PART 1 AiRnotes

Scenario Purchase Price Common Cost Demolition Cost

b. Investment
property (Land) –
at allocated cost
based on relative
FV
d. Investment Land & Building will Added to the cost of Charge to new
property @ FV be classified as 1 item Investment Property building net of
model under Investment salvage value as
Property Investment Property

Special Notes:

Scenario Cost of New Building CV of Old Building

1. Acquired property in the current reporting period with the intention to demolish the old
building and replace it with a new one and the entity will not use the old building prior to
demolition. Accounting treatment if new building will be used as:
a. PPE Construction cost plus demolition Charge to loss on retirement
cost net of salvage value
b. Inventory Allocated carrying value of old Capitalized as inventory
building + construction cost +
demolition cost net of salvage value
c. Investment Construction cost plus demolition Charge to loss on retirement
property cost net of salvage value

CV of Old Building at the CV of Old Building at

time the entity decide to the time of
Cost of New
Scenario demolish the old building demolition (if for
Building
at specific date in the some reason there is
future any)
2. Acquired property in a prior reporting period and used it as owner-occupied property. In the
current reporting period, the entity decides to demolish the old building and replace it with
a new one. Accounting treatment if new building will be used as:
a. PPE Construction Re-compute the related
cost plus depreciation charges on
demolition cost the building to depreciate
net of salvage the remaining CV of the
value building over the
b. Inventory Construction remaining useful life (the
cost plus remaining period before Charge to loss on
demolition cost demolition). Hence, old retirement
net of salvage building will have a zero
value value at the date of
c. Investment Construction planned demolition.
property cost plus
demolition cost
net of salvage
value

Other Items and their treatment

Items Accounting Treatment

1. Patterns and dies
a. Used for regular products of the company PPE – depreciated over their useful life
b. Used of specially ordered products Capitalizable to the cost of special product
2. Containers
a. Returnable (in bulk) PPE or other non-current assets
b. Returnable (small amount) Other non-current assets
c. Not returnable Expensed

Albert I. Rivera, CPA, MBA, CRA 8 of 13

PROPERTY, PLANT AND EQUIPMENT
2020-SPN PART 1 AiRnotes

Acquisition Methods
Acquisition Method Initial Measurement
1. Cash Basis Cash Price or cash price equivalent paid plus
necessary cost in bringing the asset to
working condition for its intended use
2. On Account Invoice price less discount taken or not
2 methods of recording:
a. Gross method – PPE is recorded at
invoice price before deduction
discount. On payment date, the
discount is deducted from the invoice
price by credit to PPE
b. Net method – PPE is recorded at invoice
price net of cash discount. (Preferable
approach)
3. Acquisition on deferred settlement terms a. If there is available cash price – cash
price or cash price equivalent. The
difference between cash price
equivalent and total payment is
recognized as interest expense over the
credit period unless recognized as
capitalizable borrowing cost
b. No available cash price – PV of all
payments using imputed interest
4. Acquisition through exchange a. With commercial substance – PPE
should be measured using the following
order of priority:
1st – FV of the asset given (+) cash
payment/ (-) cash received
2nd – FV of the asset received
3rd – CV of the asset give (+) cash
payment/ (-) cash received
b. Without commercial substance - CV of
the asset give (+) cash payment/ (-) cash
received
5. Trade - in PPE should be measured using the following
order of priority:
1st – FV of asset given plus cash given
2nd – FV of asset received (cash price
without trade-in)
6. Issuance of shares of stock PPE should be measured using the following
order of priority:
1st – FV of asset received
2nd – FV of shares issued
3rd – Par value of shares issued
7. Issuance of Bonds Payable PPE should be measured using the following
order of priority:
1st – FV of asset received
2nd – FV of bonds payable issued
8. Donation At FV of the asset received and accounted
for as:
a. Income from Donation – is the donor is
unrelated party. Any cost attributable
to the receipt of donation is offset to
income recognized
b. Donated capital – is the donor is a
shareholder. Any cost attributable to
the receipt of donation is offset to
donated capital (presented under
equity as share premium)

Albert I. Rivera, CPA, MBA, CRA 9 of 13

PROPERTY, PLANT AND EQUIPMENT
2020-SPN PART 1 AiRnotes

Capitalizable Cost of Machinery

1. JC acquired a new machine. Details of the acquisition are as follows:
Purchase price including VAT of 12% 1,568,000
Cost of water device to keep machine cool 8,000
Cost of safety rail and platform surrounding machine 12,000
Installation cost, including site preparation and assembling 20,000
Fees paid to consultants for advice on acquisition of the machinery 13,000
PV of the estimated dismantling cost of the new machine 10,000
Repair cost of the machine damaged while in the process of 5,000
installation
Loss on premature retirement-old machine 18,000
Other non-refundable sales tax 13,000
Cost of training for personnel 25,000
Cost of removing old machine 10,000
Royalty payment based on units produced 19,000
Cost of transporting machine 15,000
Labor of testing machine 20,000
Materials used and damaged as a result of testing the machine 10,000
Cost of adjustment to machine to make it operate more efficiently 57,000
Gratuity paid to operator of old machine, who was laid off 20,000
Required: Compute the cost of new machine.

Capitalizable Cost of Land, Building and Land Improvements

2. On 1 July 2016, DI purchased land and incurred other costs relative to the construction of a new
warehouse. A summary of economic activities is listed below:
Purchase price 925,000
Title insurance 7,500
Legal fees to purchase land 5,000
Cost of razing old building on lot 42,500
Proceeds from sale of salvage materials 6,000
Property taxes, January 1 – June 30, 2016 15,000
Cost of grading and filling building site 45,000
Cost of building construction 3,100,000
Interest on construction loan 60,000
Cost of constructing driveway 400,000
Cost of parking lot and fencing 60,000

Acquisition on Cash Basis

3. LTC acquired a factory equipment overseas on cash basis for 400,000. Additional cost incurred
include the following:
Commissions paid to brokers for the purchase of the equipment 20,000
Import duties 100,000
Non-refundable purchase taxes 40,000
Freight cost of transferring the equipment to LTC premises 4,000
Costs of assembling and installing the equipment 8,000
Costs of testing the equipment 6,000
Administration and other general overhead cost 16,800
Advertisement and promotion costs of the new product to be 15,200
produced by the equipment
Proceeds from selling of samples generated from testing the 2,000
equipment

How much is the initial cost of the equipment?

Acquisition on account
4. PRC acquired an equipment for 448,000 on account with credit term 2/15, n/30. Any discount is
computed based on the purchase price. The purchase price is inclusive of 12% VAT. PRC is VAT-
registered and any input VAT paid is refundable through deduction from monthly output VAT remitted
to BIR. Additional costs incurred include:

Albert I. Rivera, CPA, MBA, CRA 10 of 13

PROPERTY, PLANT AND EQUIPMENT
2020-SPN PART 1 AiRnotes

Cost of training the staff who will operate the equipment 40,000
Cost of relocating the equipment to a new location after it was 60,000
installed in a location originally intended by management

How much is the initial cost of the equipment?

Deferred settlement – with cash price equivalent
5. On 1 Jan 20x1, SCC purchased furniture with installment price of 520,000 and a cash price equivalent
of 400,000 by paying 40,000 down payment and issuing a 1-year non-interest bearing note of 120,000
payable in equal semi-annual installments on July 1 and December 31, 20x1. How much is the initial
cost of the furniture?
Deferred settlement – without cash price equivalent
6. On 1 Jan 20x1, RSC purchased fixtures with an installment price of 520,000 by paying 40,000 down
payment and issuing a 3-year non-interest bearing note of 480,000 payable in 3 equal annual
installments starting 31 December 20x1. The prevailing rate for the note as of 1 January 20x1 is 12%.
How much is the initial cost of the fixtures?
7. On 1 Jan 20x1, ABC acquired a building for 380,000 including 20,000 non-refundable taxes. The
purchase agreement provided for payment to be made in full on 31 Dec 20x1. Legal fees of 8,000 were
incurred in acquiring the building and paid on 1 Jan 20x1. An appropriate discount rate is 10%. How
much is the initial cost of the building?
Classes of PPE
8. ABC had the following assets on 31 Dec 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
Apples Trees (held to bear fruits to that are sold to customers) 6,000
Harvested Apples 2,000
How much is the total assets classified as PPE?

9. On April 1, 20x1, EEC purchased land and building by paying 40,000,000 and assuming a mortgage as
of 8,000,000. The land and building have appraised values of 20,000,000 and 40,000,000, respectively.
The building will be used by EEC as its new office. Additional costs relating to the purchase include the
following:

Legal cost of conveying and registering title to land 32,000

Payment to tenants to vacate premises 36,000
Option paid on the land and building 24,000
Option paid on similar land and building not acquired 12,000
Broker’s fee on the land and building 60,000
Unpaid real estate taxes prior to April 1, 20x1 assumed by ECC -
120,000
assessed on land
Real estate taxes after April 1, 20x1 80,000
Repairs and renovation costs before the building is occupied 160,000
Repair costs after building is occupied 200,000
Required:
a. How much is the cost of the land?
b. How much is the cost of the building?

Albert I. Rivera, CPA, MBA, CRA 11 of 13

PROPERTY, PLANT AND EQUIPMENT
2020-SPN PART 1 AiRnotes

Acquisition on lump-sum price (building demolished)

10. On April 1, 20x1, ABC purchased land and building for a lump-sum price of 48,000,000. The existing
building will be demolished and new building will be constructed. Additional costs relating to the
purchase include the following:
Title guarantee 80,000
Option paid for the land and old building acquired 24,000
Payments to tenants to vacate premises 48,000
Cost of razing the old building (demolition cost) 240,000
Proceeds from sale of salvaged materials 60,000
Fair value of materials salvaged from the old building and used in the new building 120,000
Construction cost of new building (completed) 34,000,000
Required:
a. If the land and old building have fair values of 20,000,000 and 40,000,000 respectively. How much
are the allocated costs of the land and the new building?
b. If 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?
c. If the old building is unusable and has an insignificant fair value. How much are the allocated costs
of the land and the new building?
d. If the old building is unusable and has insignificant fair value. How much is charged as loss on initial
recognition?

Cost of self-constructed asset

11. LHC purchased a lot for 8,000,000. Immediately after the purchase, ECC started construction of a new
building on the lot. The following were additional costs incurred by ECC.

Legal cost of conveying land 40,000

Special assessment 20,000
Survey cost 60,000
Materials, labor and overhead costs 22,000,000
Cash discounts on materials purchased not taken 120,000
Clerical and other expenses related to construction 56,000
Excavation costs 400,000
Architectural fees and building permit 240,000
Supervision by management on construction 48,000
Insurance premiums paid for workers 520,000
Payment for claim for injuries not covered by insurance 180,000
Saving to construction 800,000
Cost of changes to plans and specifications due to inefficiencies 560,000
Paying of streets and sidewalks (not included in blueprint) 40,000
Income earned on a vacant space rented as parking lot during construction 36,000

Required:
a. How much is the cost of the land?
b. How much is the cost of the building?
Cost of equipment – with decommissioning cost
12. BIC acquired an oil rig for 400,000,000. Installation and other necessary costs in bringing the equipment
to its intended condition for use totaled 80,000,000. BIC is required by law to dismantle the equipment
and restore the site where it is installed after 20 years. The estimated decommissioning and restoration
costs are 40,000,000. The imputed rate of interest is 12%. How much is the initial cost of the
equipment?
With fair value of asset given up
13. JABEE Co. exchanged equipment with MCDO Inc. Pertinent data are shown below.
Jabee Co. Mcdo Co.
Equipment 4,000,000 8,000,000
Accumulated Depreciation 800,000 3,200,000
Carrying Amount 3,200,000 4,800,000
Carrying Amount 3,800,000 4,400,000
Cash paid by Jbee to Mcdo 600,000 600,000

Albert I. Rivera, CPA, MBA, CRA 12 of 13

PROPERTY, PLANT AND EQUIPMENT
2020-SPN PART 1 AiRnotes

Required:
a. How much is the initial cost of the equipment received by Jbee?
b. How much is the initial cost of the equipment received by Mcdo?
c. How much is the gain/loss on exchange recognized by Jbee?
d. How much is the gain/loss on exchange recognized by Mcdo?
e. What if Jbee Co. cannot determine the FV of the equipment given up but is aware that the
equipment that will be received from Mcdo has a fair value of 4,400,000:
1. How much is the initial cost of the equipment received by Jbee?
2. How much is the gain/loss on exchange recognized by Jbee?
f. What if the exchange has no commercial substance?
1. How much is the initial cost of the equipment received by Jbee?
2. How much is gain/loss on exchange recognized by Jbee?
Trade-In
14. TEC traded in an old equipment for a new model.
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
Required:
a. How much is the initial cost of the equipment received by TEC?
b. How much is the gain/loss on exchange recognized by TEC?
Acquisition through issuance of own equity instrument
15. REC acquired land with FV of 4,000,000 by issuing 10,000 shares with par value of 40 per share and
quoted price of 360 per share.
Required:
a. How much is the initial cost of the equipment received by REC?
b. How much is the gain/loss on exchange recognized by REC?
c. What if the FV of the land is indeterminable:
1. How much is the initial cost of equipment received by REC?
2. How much is gain/loss on exchanged recognized by REC?
Acquisition through issuance of bonds payable
16. On 1 January 20x1, LMC acquired land with FV of 3,800,000 by issuing a 3-year, 10%, 4,000,000 bonds.
Principal is due on 1 January 20x4 but interest is due at each year-end. The prevailing market rate of
interest for a similar instrument on 1 January 20x1 is 12%. The PV of the future cash flows from the
bonds discounted at 12% is 3,087,852.
Required:
a. How much is the initial cost of equipment recognized by LMC?
b. How much is the gain/loss recognized by LMC?
c. What if the FV of the land is indeterminable:
1. How much is the initial cost of the equipment received by LMC?
2. How much is the gain/loss on exchange recognized by LMC?
Acquisition by Donation
17. GC received donation of equipment from CI an unrelated foreign corporation. The equipment has a fair
value of 4,000,000. Necessary costs incurred by GC to bring the asset to its intended condition for use
amounted to 40,000.
Required:
a. What is the journal entry to record the receipt of donation?
b. Assuming the donor is a shareholder of GC, what is the entry to record the receipt of donation?

Albert I. Rivera, CPA, MBA, CRA 13 of 13