Plant Property and Equipment - Part 1 - PW - CWR

Property, Plant, and Equipment
 Property, Plant, and Equipment Defined  Depreciating Assets used in Mining

 Initial Recognition and Valuation  Measurement of Property, Plant, and
 List of Property, Plant, and Equipment Equipment after Initial Recognition
and its Characteristics  Impairment of Asset Values
 Types of Acquisition of Property, Plant, and
Equipment  Change in Accounting Estimate affecting
 Depreciation Property, Plant, and Equipment
 Depreciation Methods  Correction of Errors in Depreciation,
 Component Depreciation Derecognition, and Disclosures
 Partial Period Depreciation  Task Performance, Generalization, and
 Depletion of Natural Resources eLMS
Property, Plant, and Equipment Defined
IAS 16 defines PPE as tangible items that are:
Held for use in: Expected to be used for:
Production Administrative
>1 Period
purposes
Rental to others http://excellent-branding.com/wp-content/uploads/2012/07/perusahaan-office.png
https://pngimage.net/wp-content/uploads/2018/06/rental-png-2.png
https://pngimage.net/wp-content/uploads/2018/06/production-png.png
http://www.pngmart.com/files/5/City-PNG-HD.png
Property of STI BM1706 Weeks 7-9

Initial Recognition and Valuation
PPE must comply with the following conditions to be recognized as an asset:
Future Economic Benefits Cost can be measured reliably

Source: https://www.revenuearchitects.com/wp-content/uploads/2017/01/revenuemetrics.png
Property of STI BM1706 https://png.pngtree.com/element_origin_min_pic/17/08/06/02349aae9b64892dee1d4356d4794dad.jpg
http://www.pngmart.com/files/5/City-PNG-HD.png Weeks 7-9
Initial Recognition and Valuation
PPE should be recognized initially at its COST.
Cost = Purchase Price (including import duties, purchase

taxes less discounts and rebates) + Directly
Attributable Cost + Cost of Dismantling, Removing,
and Restoration
Property of STI BM1706 Source: http://www.pngmart.com/files/5/City-PNG-HD.png

Weeks 7-9
List of Property, Plant, and
Equipment and its Characteristics
Land
Equipment
Land Improvements Buildings

Source: https://encrypted-tbn0.gstatic.com/images?q=tbn:ANd9GcS-od7NUrc39Z0WJ2sHaDtXQxtVDSUgXYO5EQRaL-
Property of STI BM1706 mvNdkfJ8skhttps://pngimage.net/wp-content/uploads/2018/05/equipment-png.png

https://d3qyu496o2hwvq.cloudfront.net/wp-content/uploads/2017/05/MH_DESIGN_9415_0363-10-712x475.jpg Weeks 7-9
Property of STI
Collaborative Task
BM1706 https://d3hpmacz89yub8.cloudfront.net/wp-content/uploads/2016/11/AI_Image_1.png Weeks 7-9
Types of Acquisition of Property, Plant,
and Equipment
1 Acquisition by Self-Construction
Property of STI BM1706 http://www.pngmart.com/files/7/Construction-Transparent-PNG.png

Weeks 7-9
ILLUSTRATIVE PROBLEM
ABC Company is involved in the service of constructing
buildings, offices, and theatres. During the current year, it
constructed a building for its own use. The following are the
information related to the cost of construction of its buildings:
Building Buildings constructed for
constructed for own use
clients
Direct material P37,500,000 P6,000,000
Direct labor 33,750,000 3,750,000
https://banner2.kisspng.com/20180529/bzy/kisspng-problem-solving-creativity-graphic-design-problem-solving-5b0dce4ebedeb4.3588072715276314387818.jpg

Determine the total cost of buildings constructed for clients and building
constructed for own use, assuming the following information:
1. Overhead is charged to normal operations and to building for own use

based on direct labor cost.
2. Normal operation is charged with overhead at its normal rate based on
direct labor cost and any incremental overhead is charged to building
constructed for own use.


Types of Acquisition of Property,
Plant, and Equipment
Three (3) considerations when capitalizing interest cost
1 QUALIFYING ASSET
2 CAPITALIZATION
PERIOD
3 AMOUNT TO
CAPITALIZE https://images.all-free-download.com/images/graphicthumb/sense_of_science_and_technology_background_banner_vector_3_159485.jpg

Types of Acquisition of Property,
Plant, and Equipment
Two (2) types of capitalizable borrowings
Specific borrowing
𝐶 𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑒𝑑 𝐶𝑜𝑠𝑡 ( 𝑠𝑝𝑒𝑐𝑖𝑓𝑖𝑐 )=Interest Expense − Interest Income
General borrowing

JKL Company incurred the following expenses related to

the construction of its warehouse which started on January
1 and was completed December 31.
January 1 P5,000,000 August 1 P1,500,000

March 31 2,500,000 December 31 500,000
June 1 3,000,000

Scenario 1: On January 1, 201A, JKL obtained a loan of

P10,000,000 with a 10% interest rate, to finance the construction
of warehouse. Before their disbursements, the proceeds of the loan
were temporarily invested and earned interest income amounting to
P50,000.

Requirement: Compute for the capitalizable borrowing cost and the
journal entries necessary for the transaction.
of STI
Property BM1706 Weeks 7-9

JKL incurred the following general borrowings during 201A

that were used to finance the construction of the company’s
new building:
Date obtained Term Interest Rate Amount
Year before the date of 5 years 7.5% 5,000,000
construction
January 1, 201A 2 years 12% 10,000,000
Requirement: Compute for the capitalizable borrowing cost

On January 1, 201A, JKL incurred a loan of P 6,000,000 with a 10% interest
rate to finance the construction of its warehouse. Interest earned from
temporary investment of the proceeds of the loan before their disbursement
amounted to P50,000. The following are the loans of JKL, part of which were
used for the construction of activities.
Date obtained Term Interest Rate Amount

Year before the date of Construction 5 years 7.5% 5,000,000
January 1, 201A 2 years 12% 10,000,000
Requirement: Compute for the capitalizable borrowing cost

and Equipment
2 Acquisition under Deferred-Payment Contracts

https://casadecalifornia.com/image/101213-full_free-handshake-cliparts-clip-art-on-people-shaking-hands-clipart.png
http://png.clipart-library.com/images4/4/contract-clipart-2.png
and Equipment
3 Acquisition on Exchanges of Nonmonetary Assets
Property of STI BM1706 https://thumbs.dreamstime.com/z/handsshake-auction-barter-trade-17406503.jpg

Weeks 7-9
and Equipment
Types of Exchange Accounting Guidance
Exchange has commercial substance Recognized gains and losses
immediately
Exchange lacks commercial substance - Defer gains; recognize
no cash received losses immediately
Exchange lacks commercial substance – Recognize partial gain;
cash received recognize losses
immediately

Exchanges – Loss Situation. ABC Inc. trades its used machine for a new model at JK Business
Solutions. The exchange has a commercial substance. The used machine has a book value of P
800,000 (original cost P1,200,000 less P400,000 accumulated depreciation) and a fair value of P
600,000. The new model lists for P1,600,000 and JK gives ABC Inc. a trade-in allowance of P
900,000 for the used machine.
ABC Inc. computes the cost of the new asset as follows:
List price of new machine P 1,600,000

Less: Trade-in allowance for used machine 900,000
Cash payment due 700,000
Fair value of used machine 600,000
Cost of new machine P 1,300,000

ABC Inc. records this transaction as follows.
Equipment P1,300,000
Accumulated Depreciation - Equipment 400,000
Loss on Disposal of Equipment 200,000
Equipment P1,200,000
Cash 700,000
To verify the loss on the disposal of the used machine. The computation is as follows:
Fair value of the used machine P 600,000
Less: Book value of used machine 800,000
Loss on disposal of used machine P 200,000

Exchanges – Gain Situation. Sonny Transportation Company exchanged a number of
used trucks plus cash for a semi-truck. The used trucks have a combined book value
of P 4,200,000 (cost P 6,400,000 – P 2,200,000 accumulated depreciation). Sonny’s
purchasing agent and experienced in the secondhand market, indicates that the used
trucks have a fair value of P 4,900,000. In addition to the trucks, Sonny must pay
P1,100,000 cash for the semi-truck (Kieso, 2016).
The cost of the semi-truck is computed as follows:

Fair value of trucks exchanged P 4,900,000
Cash Paid 1,100,000
Cost of semi-truck P 6,000,000

Sonny records this transaction as follows.

Truck (semi) P6,000,000
Accumulated Depreciation - Trucks 2,200,000
Trucks (used) P6,400,000
Gain on Disposal of Trucks 700,000
Cash 1,100,000
Computation:
Fair value of the used trucks P 4,900,000
Less: Book value of used trucks 4,200,000
Loss on disposal of used machine P 700,000

Lacks Commercial Substance - No Cash Received. Assuming that the Sonny Transportation
Company exchange lacks commercial substance. That is, economic position of Sonny did not
change significantly as a result of this exchange. In this case, Sonny defers the gain of P
700,000 and reduces the basis of the semi-truck.
The following shows two (2) different but acceptable computations to illustrate the reduction
(Kieso, 2016).
Fair value of semi-truck P 6,000,000 Book value of used trucks P 4,200,000

Less: Gain deferred 700,000 OR Plus: Cash paid 1,100,000
Basis of semi-truck P 5,300,000 Basis of semi-truck P 5,300,000

Lacks Commercial Substance - Some Cash Received. JC Corporation traded in used
machinery with a book value of P 600,000 (cost 1,100,000 less accumulated
depreciation P500,000) and a fair value of P1,000,000. It receives as an exchange a
machine with a fair value of P900,000 plus cash of P100,000.
Requirement: Compute for the total gain on the exchange
Fair value of the used trucks P 1,000,000

Less: Book value of used trucks 600,000
Total Gain P 400,000

Ask the
Construction of Ham Co.’s new store began on April 1, 20X8. The following are the
costs were incurred on the construction:
Freehold land P 4,500,000 Materials P 7,800,000
Architect fees 620,000 Direct labor costs 11,200,000
Site preparation 1,650,000 Legal fees 2,400,000
General overheads P 940,000

The store was completed on January 1, 20X9 and brought into use following its grand
opening on April 1, 20X9. Ham Co. issued P25,000,000 unsecured loan on April 1, 20X8
to aid construction of the new store. The loan carried an interest rate per annum and is
repayable on April 1, 2X11.
Requirement: Calculate the amount to be included as property, plant, and equipment in
respect of the new store. Association of Chartered Certified Accountants. (2018). Accounting for Property, Plant and Equipment. Retrieved on January 28, 2019, from https://www.accaglobal.com:
https://www.accaglobal.com/vn/en/student/exam-support-resources/fundamentals-exams-study-resources/f7/technical-articles/ppe.html
https://images.lingscars.com/images/lottery/lottery-winner.png

Ask the
Solution:
Freehold land P 4,500,000
Architect fees 620,000
Site preparation 1,650,000
Materials 7,800,000
Direct labor costs 11,200,000
Legal fees 2,400,000
Borrowing costs (25M x 8% ) x 1,500,000
9/12
Total amount to be capitalized P 29,670,000

Depreciation
An accounting process of allocating the cost of tangible assets to
expense in a systematic and rational manner
Factors Involved in Depreciation Process
Depreciable Amount Estimated Useful Life Systematic Manner

https://pngimage.net/wp-content/uploads/2018/06/method-png-4.png
http://cdn.onlinewebfonts.com/svg/img_43419.png
https://www.myworkdrive.com/wp-content/uploads/2017/11/VPN-Costs-Calc.png

Depreciation Methods
1. Straight-Line Method
𝐶𝑜𝑠𝑡 −𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑉𝑎𝑙𝑢𝑒
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛𝑒𝑥𝑝𝑒𝑛𝑠𝑒 ( 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 )=
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑈𝑠𝑒𝑓𝑢𝑙𝑙𝑖𝑓𝑒
2. Activity Method

Depreciation Methods
3. Decreasing-Charge Method
4. Group and Composite Depreciation

Methods - Multiple items of PPE are subject to
depreciation
Ask the
On January 1, 20X4, K Company bought machinery under a contract that
required a down payment of P100,000, plus 24 monthly payments of
P50,000 each, for total cash payments of P1,300,000. The cash price of
machinery was P1,100,000. The machinery has a useful life of 10 years and a
residual value of P50,000. The entity used the straight-line depreciation.
Requirement: Calculate the amount that should be reported as depreciation
for 20X4.

Ask the
Solution:
Cost of machinery P 1,100,000

Residual value 50,000
Depreciable amount 1,050,000
Straight line depreciation (1,050,000/10) P 105,000

Component Depreciation
Under this concept, 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 shall be depreciated
separately.
Property of STI BM1706 https://www.diypropertymanagement.com.au/wp-content/uploads/diy-depreciation.png

Weeks 7-9
Refer to the Cebu Pacific Corporation under

component depreciation on Page 12 of the
handout.

Cost of the airplane:

Passenger seats P 4,000,000
Engine 20,000,000
Other parts 76,000,000
The total annual depreciation for the aircraft is computed as follows, using the
straight-line depreciation:
Passenger seats P4,000,000/5 P 800,000
Engine (P20,000,000 - P400,000) / 5 3,920,000
Other parts (P76,000,000 – P7,000,000) /15 4,600,000
Total depreciation P 9,320,000

Depletion on Natural Resources
What are
NATURAL
RESOURCES?
http://www.enerji.gov.tr/Resources/Sites/1/Images/sections/cevreiklim/world.png

Depreciation for Natural Resources is DEPLETION.
To compute for depletion:
𝐷𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛𝑒𝑥𝑝𝑒𝑛𝑠𝑒=𝐷𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑥𝑈𝑛𝑖𝑡𝑠𝑒𝑥𝑡𝑟𝑎𝑐𝑡𝑒𝑑

Where:
𝐷𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 =¿ ¿


Refer to
DCJ Mining Company
Illustrative Problem in
Page 13 of 05 Handout 1

Depreciating Assets used in Mining
𝐷 𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑚𝑎𝑐h𝑖𝑛𝑒𝑟𝑦

𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛𝑒𝑥𝑝𝑒𝑛𝑠𝑒=
𝐸 𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑𝑢𝑠𝑒𝑓𝑢𝑙𝑙𝑖𝑓𝑒
https://vignette.wikia.nocookie.net/sqmegapolis/images/8/85/Diamond_Mine.png/revision/latest?cb=20130504112717

Ask the
Keno Company acquired a coal mine for P25,000,000. Intangible

development costs totaled P6,000,000. After extraction has occurred, the
entity must restore the property and the estimated fair value of the
obligation is P3,000,000. The property can be sold for P8,500,000 after
restoration. The entity estimated that 500,000 tons of coal can be
extracted. The entity extracted 90,000 tons in the first year.
Requirement: Compute the depletion for the year.

Ask the
Solution
Acquisition cost P 25,000,000
Intangible development costs 6,000,000
Estimated restoration cost 3,000,000
Total cost P34,000,000
Less: Residual Value (8,500,000)
Depletable amount 25,500,000
Rate per ton (25,500,000/500,000) 51
Depletion (90,000 x 51) P 4,590,000

Measurement of Property, Plant, and
Equipment after Initial Recognition
After initial recognition, PPE should be measured at

either the COST
MODEL or
REVALUATION MODEL.

Impairment of Asset Values
How do you record the

impairment of an item
of Property, Plant, and
Equipment?
https://pngimage.net/wp-content/uploads/2018/06/property-png-9.png

Impairment of Asset Values
For illustration, refer to the MCF Inc.

on Page 16 of the handout.

Change in Accounting Estimate
affecting Property, Plant, and
Equipment
What is Change in Accounting
Estimate?

Change in Accounting Estimate
affecting Property, Plant, and
Equipment
How does Change in Accounting

Estimate affect the value of Property,
Plant, and Equipment?

Correction of Errors in Depreciation,
Derecognition, and Disclosures
How are errors corrected in

depreciation?

Derecognition and Disclosures
When should Property, Plant, and

Equipment be derecognized?

Derecognition, and Disclosures
What are the required
disclosures for Property,
Plant, and Equipment?

TASK PERFORMANCE
Answer all the Practice test
questions and put your
solution in a 10-column
worksheet.
Deadline of submission:
Day before the midterm
examination
https://images.unsplash.com/photo-1529460608-bc455fccd5a4?ixlib=rb-
0.3.5&ixid=eyJhcHBfaWQiOjEyMDd9&s=5eb86d7c653b1361a5116b10f77dc9fe&w=1000&q=80

MOCK BOARD

Learning
Management
System
Answer eLMS Quiz
under 05 Property, Plant,
and Equipment topic.
http://hdwallpapers4us.com/wp-content/uploads/2018/02/Technology-HD-Wallpaper-Background.jpg

Plant Property and Equipment - Part 1 - PW - CWR

Uploaded by

Copyright:

Available Formats

Plant Property and Equipment - Part 1 - PW - CWR

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Plant Property and Equipment - Part 1 - PW - CWR

Uploaded by

Copyright:

Available Formats

Property, Plant, and Equipment

 Property, Plant, and Equipment Defined  Depreciating Assets used in Mining

Property of STI BM1706 Weeks 7-9

PPE must comply with the following conditions to be recognized as an asset:

Future Economic Benefits Cost can be measured reliably

PPE should be recognized initially at its COST.

Cost = Purchase Price (including import duties, purchase

Property of STI BM1706 Source: http://www.pngmart.com/files/5/City-PNG-HD.png

Land Improvements Buildings

Property of STI BM1706 mvNdkfJ8skhttps://pngimage.net/wp-content/uploads/2018/05/equipment-png.png

Property of STI BM1706 http://www.pngmart.com/files/7/Construction-Transparent-PNG.png

Property of STI BM1706 Weeks 7-9

1. Overhead is charged to normal operations and to building for own use

Property of STI BM1706 Weeks 7-9

Property of STI BM1706 Weeks 7-9

Property of STI BM1706 Weeks 7-9

JKL Company incurred the following expenses related to

January 1 P5,000,000 August 1 P1,500,000

Property of STI BM1706 Weeks 7-9

Scenario 1: On January 1, 201A, JKL obtained a loan of

Property BM1706 Weeks 7-9

JKL incurred the following general borrowings during 201A

Property of STI BM1706 Weeks 7-9

Date obtained Term Interest Rate Amount

Property of STI BM1706 Weeks 7-9

2 Acquisition under Deferred-Payment Contracts

Property of STI BM1706 Weeks 7-9

Property of STI BM1706 https://thumbs.dreamstime.com/z/handsshake-auction-barter-trade-17406503.jpg

Property of STI BM1706 Weeks 7-9

ABC Inc. computes the cost of the new asset as follows:

List price of new machine P 1,600,000

Property of STI BM1706 Weeks 7-9

Property of STI BM1706 Weeks 7-9

The cost of the semi-truck is computed as follows:

Property of STI BM1706 Weeks 7-9

Sonny records this transaction as follows.

Property of STI BM1706 Weeks 7-9

Fair value of semi-truck P 6,000,000 Book value of used trucks P 4,200,000

Property of STI BM1706 Weeks 7-9

Requirement: Compute for the total gain on the exchange

Fair value of the used trucks P 1,000,000

Property of STI BM1706 Weeks 7-9

General overheads P 940,000

Property of STI BM1706 Weeks 7-9

Property of STI BM1706 Weeks 7-9

Depreciable Amount Estimated Useful Life Systematic Manner

Property of STI BM1706 Weeks 7-9

Property of STI BM1706 Weeks 7-9

4. Group and Composite Depreciation

Property of STI BM1706 Weeks 7-9

Cost of machinery P 1,100,000

Property of STI BM1706 Weeks 7-9

Property of STI BM1706 https://www.diypropertymanagement.com.au/wp-content/uploads/diy-depreciation.png

Refer to the Cebu Pacific Corporation under

Property of STI BM1706 Weeks 7-9

Cost of the airplane:

Property of STI BM1706 Weeks 7-9

Property of STI BM1706 Weeks 7-9

Depreciation for Natural Resources is DEPLETION.