FAITH COLLEGES

INTACC1
PPE PART II

COST OF LAND AND BUILDING

Land Account

Costs chargeable to Land Special Notes:

1. Draining cost and filling the land 1. Land improvements
2. Survey cost a. Not depreciable – capitalizable cost of
3. Unpaid real property taxes on the land up to the date of land (e.g cost of surveying, clearing
acquisition assumed by the buyer grading and leveling subdividing and other
4. Option cost of the land acquired. If the land is not cost of permanent improvement)
acquired, the cost of the option is treated as expensed b. Depreciable – charge to “Land
- Option price is the price to be paid by an investor for an improvements” depreciated over useful
option contract, based upon the security of the life. (e.g fences, water systems, drainage
underlying asset and the time left until the option systems, sidewalks and pavements,
expires landscaping)
- Earnest money deposit is the downpayment made by a 2. Special assessment – capitalizable cost of land
purchaser of real estate as evidence of good faith; a 3. Real property tax – expensed when incurred
deposit or partial payment and therefore capitalizable however unpaid real property taxes accruing as
cost of the asset acquired of the date of acquisition assumed by the buyer
5. Purchase price should be capitalized.
6. Cost of permanent improvement (cost of grading and
leveling)
7. Commission cost paid to brokers and agents
8. Legal fees to close escrow
9. Cost to relocate or reconstruct property of others
occupying the land so as to obtain ownership
10. Cost to register the land and other cost of transferring
the title in the name of the buyer
11. Payments to the tenants to convince them to vacate the
premises in order to prepare the land for its intended
use but not to make room for the construction of a new
building
12. Legal fees and other expenditures for establishing a
clean title
13. Cost of clearing unwanted old structures, less proceeds
from salvage excluding demolition cost
14. Liabilities assumed by the buyer. (e.g mortgages
encumbrances and interest on such mortgages assumed
by the buyer

Building Account

Costs chargeable to Building when purchased Costs to the building when constructed
1. Purchase price 1. fees paid for the supervision
2. Legal fees and other expenses incurred in connection 2. building permit and licenses
with the purchase 3. architect fees
3. Liabilities in the building assumed by the buyer 4. construction cost
4. Renovation and remodeling cost on the building to 5. expenditures for service equipment and fixtures made
make it suitable for its intended use a permanent part of the structure
5. Unpaid real property taxes on the building up to date of 6. expenditures incurred during the construction period
acquisition assumed by the buyer such as interest on construction loans and insurance
6. Payment of the tenants to convince them to vacate the 7. cost of demolishing old building less proceeds from
building salvage. (refer to PIC Interpretation)
8. Excavation cost
9. cost of security fences while construction and other
temporary building to house the constructions materials
and tools.

Special notes
1. Insurance
a. taken during construction - part of cost of the
building
b. Not taken and there is a claim for damages – claims
for damages shall be treated as expense
2. Building Fixtures
a. immovable – part of the cost of the building
b. movable – charged to furniture and fixture and
depreciated over their useful life.
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3. Ventilating system, lighting and elevator
a. installed during construction – charged to building
account
b. not installed during construction – charged to building
improvements and depreciated of the shorter of useful
life or remaining life of the building.

PIC Interpretation on Land and Building

1. Land and Building are purchased at a single cost

a. Old building is usable – allocate the cost to land and building using the relative fair value
b. Old building is unusable – allocate the cost to land only

2. The old building is to be demolished immediately to make room for construction of a new building

New building is accounted for as PPE or Investment Property

a. Carrying amount of the usable old building is recognized as a loss
b. Demolition cost less salvage value is capitalized as cost of the new building

New building is accounted for as Inventory

a. Carrying amount of the usable building is capitalized as cost of the new building
b. Demolition cost less salvage value is capitalized as cost of the new building

If the old building is demolished to prepare the land for its intended use but not to make room for the construction of the
new building the net demolition cost is capitalized as cost of the land.

3. A building is acquired and used in a prior period but demolished in the current period to make room for construction of a
new building.

Whether PPE, Inventory or Investment Property

a. Carrying amount of the usable old building is recognized as a loss
b. Demolition cost less salvage value is capitalized as cost of the new building
c. if subject to contract of lease, any payment to tenants to vacate the old building shall be charged to the cost of the new
building.

ILLUSTRATION I

On January, Jimmy Corporation purchased a parcel of land as a factory site for P3,200,000. An old building on the property was
demolished right away and construction begun on a new warehouse that was completed April 30 of the same year. Costs incurred (and
cash inflows for the two items sold) on the entire project are listed below:
Cost of demolishing old building 280,000
Architects fees 317,000
Legal fees title investigation 41,000
Construction costs 9,500,000
Interest on specific borrowing 140,000
Landfill for building site 193,000
Clearing of trees from building site 96,000
Insurance on building for one year beginning April 30, 2015 150,000
Temporary buildings used for construction activities 290,000
Land survey 40,000
Excavation of basement 132,000
Salvage material from demolition sold 18,000
Timber (after clearing trees) sold 33,000
Cost of paving parking lot adjoining building 100,000
Cost of shrubs, trees, and other landscaping 130,000
Special assessment for street project 21,000
Building permit fees 171,000
Savings of construction 25,000

Required: determine the cost of the following

1. Land
2. New building
3. Land Improvement

Machinery

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1. Purchase price Special Notes:
2. Freight, handling, storage and other cost related to the 1. Removal cost
acquisition If a machinery is removed and retire to make
3. Insurance while on transit room for the installation of a new one, this is
4. Installation cost, including site preparation and charge to expense
assembling 2. VAT
5. Cost of testing and trial run, and other cost necessary in Not capitalizable and offset against output tax
preparing the machinery for its intended use 3. Tools
6. Initial estimate of cost of dismantling and removing the Classified as machine tools and hand tools and
machinery and restoring the site on which it is located segregated from the machinery account
and for which the entity has a present obligation 4. Pattern and dies
7. Fees paid to consultants for advice on the acquisition of a. used for the regular product – recorded as
the machinery assets and depreciated over useful life
8. Cost of safety rail and platform surrounding machine b. used for specially ordered product – part of
9. Cost of water device to keep machine cool the cost of the special product
5. Equipment includes delivery equipment, store
and office equipment and furniture and fixtures.
6. Returnable containers
a. big in units or great bulk – PPE or other
noncurrent assets
b. small and involve small amounts – other
noncurrent assets
c. not refundable – expensed outright

Subsequent Cost

Addition
a. An entirely new unit – capitalized and depreciated over the useful life
b. Expansion, enlargement or extension of the old asset – capitalized and depreciated over the shorter of useful life of the expansion
or remaining life of the asset.

Improvements or betterments
Are modifications or alterations which increase the service life or the capacity of the asset and normally capitalized

Replacements and Repairs

a. replacement of the old asset by a new one – new asset is capitalizable
b. replacement of major parts or extraordinary repairs – usually capitalizable
c. replacement of minor parts or ordinary repairs – normally charged to expense

Repairs and maintenance

- Charge to an account repair and maintenance

Rearrangement Cost
- Expensed as incurred

ILLUSTRATION 2

Peter Co. acquired a new machine. Details of the acquisition are as follows:
Cash paid for machine including VAT of P60,000 560,000
Royalty payments base on units produced 19,000
Cost of transporting machine 15,000
Cost of installation by expert fitter 40,000
Labor of testing machine 20,000
Materials used and damaged as a result of testing the machine 10,000
Repair cost of new machine damaged in the process of installation 12,000
Cost of training for personnel who will use the machine 25,000
Cost of safety rails and platforms surrounding machine 50,000
Cost of water device to keep machine cool 70,000
Cost of adjustment to machine to make it operate more efficiently 57,000
Estimated dismantling cost be incurred as required by contract 65,000
Cost of removing old machine 10,000
Loss on premature retirement of old machine 120,000
Gratuity paid to operator of old machine, who was laid off 20,000

Required: Compute for the cost of the new machine

DIY DRILLS

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1. Faith Company incurred the following expenditures related to the land and building:

Cash paid for land and dilapidated building 1,000,000

Removal of old building to make room for construction of new building 50,000
Payment to tenants for vacating old building 15,000
Architect fee for a new building 200,000
Building permit for new construction 30,000
Fees for title search 10,000
Survey before construction of new building 20,000
Excavation before new construction 100,000
New building constructed 6,000,000
Assessment by city for drainage project 5,000
Cost of grading leveling and landfill 45,000
Driveways and walks to new building from street (part of building plan) 40,000
Temporary quarters for construction crew 80,000
Temparary building to house tools and materials 60,000
Cost of changes during construction to make new building more energy efficient 50,000
Cost of window broken by vandals 25,000

a. Compute for the cost of land

b. Compute for the cost of the new building

2. Faith Company acquired a machine and incurred the following costs

Cash paid for machinery, including Vat of P96,000 896,000

Cost of transporting machine 30,000
Labor cost of installation by expert fitter 50,000
Labor cost of testing machines 40,000
Insurance cost for the current year 15,000
Cost of training for personnel who will use the machine 25,000
Cost of safety rails and platform surrounding machine 60,000
Cost of water device to keep machine cool 80,000
Cost of adjustment to machine to make it operate more efficienty 75,000
Estimated dismantling cost to be incurred as required by contract 65,000

Compute for the total amount capitalizable as cost of the machine

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