PROPERTY, PLANT AND EQUIPEMENT

( INITIAL RECOGNITION AND MEASUREMENT )

Property, Plant and Equipment

a. Tangible Assets
b. Used in business
c. Long-term in nature

*recognized an asset when it is probable that future economic benefits associated with the item will
flow to the entity AND the cost of the item can be measured reliably

Initial Measurement
PPE is initially measured at COST.

Costs include the following:

1. Purchase Price including import duties, non-refundable purchase taxes, less trade discounts
and rebates.
2. Direct Costs
(bringing the asset to the location and conditioned for intended use)
3. Initial estimate of dismantlement, removal and site restoration costs
(obligation by acquiring or using the asset other than to produce inventories)

*Self-constructed asset is determined using the same principles for acquired asset. It excludes
internal profits and the cost of abnormal amounts of wasted material, labor, or other resources
incurred in self-constructing the asset.

LAND
It is used in the entity’s operations as “owner occupied” property. Land held for future plant site is
also classified as PPE.

COST OF LAND
1. Purchase price and other necessary costs (broker’s commission)
2. Closing costs (titling costs, attorney’s fees, recording fees)
3. Costs incurred in getting the land in the condition for its intended use (surveying, grading,
filling, draining, clearing)
4. Unpaid taxes prior to date of acquisition assumed by the buyer.
***expense when taxes incurred after acquisition date
5. Assumption of any liens, mortgages, or encumbrances on the property.
6. Special assessments for local government-maintained improvements.
7. Option paid to acquire the land.
***expense when the land is not acquired
8. Costs incurred to induce tenants to vacate premises and cost of relocating and
reconstructing property belonging to others.
9. Initial estimate of restoration costs for which the entity has present obligation.
10. Additional land improvements that have indefinite useful life.

LAND IMPROVEMENTS
These are enhancements to the land which have definite useful life such as private driveways, walks,
fences, parking lots, drainages and water systems, and cost of tree shrubs, plants, and other
landscaping. It is also usually depreciated over estimated useful lives.

BUILDING (PLANT)
It is used in the entity’s operations as “owner occupied” property. Building being constructed or
developed for future use as owner occupied” property is also classified as PPE.
COST of PURCHASED BUILDING
1. Purchase price and other necessary costs (broker’s commission and legal fees)
2. Assumption of any liens, mortgages, or encumbrances on the property.
3. Option paid to acquire the building.
***expense when the land is not acquired
4. Unpaid taxes prior to date of acquisition assumed by the buyer.
***expense when taxes incurred after acquisition date
5. Costs incurred to induce tenants to vacate premises.
6. Costs of getting the building in the condition for its intended use prior to occupancy
(remodeling, renovation, and other repairs)
***expense when repairs and maintenance costs incurred after the building is put to the
condition

COST OF SELF-CONSTRUCTED BUILDING

1. Materials, labor, and overhead costs incurred during construction
2. Architectural costs, supervision costs, and costs of building permit
3. Excavation costs
4. Insurance costs and safety inspection fees
5. Costs of temporary structures build during construction ( temporary safety fence,
construction offices, sleeping quarters for laborers, and materials and tools shed)
6. Interest on borrowings made to finance construction

BUILDING IMPROVEMENT
It refers to costs incurred subsequent to occupancy of a purchased building or subsequent to
completion of self-constructed building that either increase the useful life of building or improve its
current state.

COST of BUILDING IMPROVEMENT

1. Cost of elevator, escalator, or similar items that was not originally included in the purchased
building or in the blueprint of self-constructed building
2. Ventilation systems, plumbing, and lighting systems installed AFTER occupancy of a
purchased building/self-constructed building
3. Immovable fixtures attached to the building
***if removed, building would be damaged (compartments and cranes)
***movable fixtures are classified as furniture and fixtures

EQUIPMENT
It includes delivery and transportation equipment, office equipment, machinery, furniture and
fixtures, factory equipment, and similar fixed assets.

COST of EQUIPMENT
1. Purchase price and other necessary costs (broker’s commission and nonrefundable purchase
taxes)
2. Freight, handling charges, and insurance on the equipment while in transit
3. Cost of necessary special foundations or platform
4. Assembling and installation costs
5. Costs of testing and conducting runs
6. The initial estimate of decommissioning and restoration costs for which the entity has a
present obligation

BEARER PLANTS
1. It is use in the production or supply of agricultural produce;
2. It is expected to bear produce for more than one period; AND
3. It has a remote likelihood of being sold as agricultural produce.

LUMPSUM PURCHASE OF ITEMS OF PPE

It is allocated to the individual assets based on their RELATIVE FAIR VALUES at the date of
purchase
PROBLEM 1
GRACE Co. recently acquired two items of equipment.
✔ Acquired a press at an invoice price of P5,000,000 subject to a 5% cash discount which was
taken. Costs of freight and insurance during shipment were P50,000 and installation cost
amounted to P200,000. The cost of testing the equipment is P50,000 while the
administration cost is amounted to P30,000.
✔ Acquired a welding machine at an invoice price of P3,000,000 subject to a 10% cash
discount which was not taken. Additional welding supplies were acquired at a cost of
P100,000.

*admin costs is expense outright.

Cash Price (5,000,000 * 95%) 4,750,000

Freight & Insurance 50,000
Installation costs 200,000
Cost of testing 50,000
Total Costs of Press 5,050,000
Cash Price (3,000,000 * 90%) 2,700,000
Total increase 7,750,000

Required: What is the total increase in the equipment account as a result of the transactions?

PROBLEM 2
MERCY Company purchased equipment by making a down payment of P500,000 and issuing a
note payable for P1,800,000. A payment of P600,000 is to be made at the end of each year for three
years. The applicable rate of interest is8%. The PV of an ordinary annuity of 1 for three years at 8%
is 2.58, and the PV for the future amount of a single sum for three years at 8% is .735. Shipping
charges for the equipment of P 100,000 and installation charges of P250,000 were incurred.

Required:
1. How much is the capitalized cost of the equipment?

PV of P (600,000 * 2.58) 1,548,000

Shipping Costs 100,000
Installation charges 250,000
Downpayment 500,000
Cost of Equipment 2,398,000

2. Prepare the necessary journal entries pertaining to the transactions

Equipment 2,398,000
Discount on Notes Payable 252,000
Cash (500,000 + 100,000 + 250,000) 850,000
Notes Payable 1,800,000

Face Value of NP 1,800,000

PV of NP 1,548,000
Discount on NP 252,000

PROBLEM 3
COMPASSION Company incurred the following costs at the beginning of the current year:
Cost of land 1,000,000
Cost of building 4,000,000
Remodeling and repairs prior to occupancy 500,000
Escrow fee 100,000
Clearing, leveling and landfill 250,000
Property tax for period after the acquisition 150,000
not included
 Real estate commission 300,000

Required:
1. Compute the cost of building
Cost of Building 4,000,000
Remodeling 500,000
Allocated Costs (400,000 x 4/5) 320,000
Total Costs of Building 4,820,000

2. Compute the cost of land

Cost of Land 1,000,000

Clearing… 250,000
Allocated costs (400,000 x 1/5) 80,000
Total Cost of Land 1,330,000

PROBLEM 4
LOVE Company incurred the following costs during the current year:
Option fee for land acquired P 10,000
Option fee for land not acquired 10,000
Taxes in arrears on land 50,000
Payment for land 1,000,000
Architect fee 230,000
Payment to city hall for approval of building construction 120,000
Contract price for factory building 5,000,000
Safety fence around construction site 35,000
Safety inspection on building 30,000
Removal of safety fence after completion of building 20,000
New fence surrounding the factory 80,000
Driveway, parking bay and safety lighting 550,000
Trees, shrubs and other landscaping 200,000

Required:
1. Compute the cost of land. 1,060,00
2. Compute the cost of new building 5,435,000
3. Compute the cost of land improvement 830,000

PROBLEM 5
FAITH Corp. was incorporated on January 2, 2018. The following items relate to the FAITH’s
property and equipment transactions:

Cost of land, which included an old apartment building appraised at P 3,000,000

P300,000
Apartment building mortgage assumed, including related interest due at the 80,000
time of purchase
Delinquent property taxes assumed by FAITH 30,000
Payments to tenants to vacate the apartment building 20,000
Cost of razing the apartment building 40,000
Proceeds from sale of salvaged materials (10,000)
Architects fee for new building 60,000
Building permit for new building 40,000
Fee for title search 25,000
Survey before construction of new building 20,000
Excavation before construction of new building 100,000
Payment to building contractor 10,000,000
Assessment by city for drainage project 15,000
Cost of grading and leveling 50,000
Temporary quarters for construction crew 80,000
 Temporary building to house tools and materials 50,000
Cost of changes during construction to make new building more energy 90,000
efficient
Payment of medical bills of employees accidentally injured while inspecting 18,000
building construction
Cost of paving driveway and parking lot 60,000
Cost of installing lights in parking lot 12,000
Premium for insurance on building during construction 30,000
Cost of open house to celebrate opening of new building 50,000
Cost of widows broken by vandals distracted by the celebration 12,000

Required: Compute the following:

1. Cost of Land 3,270,000
2. Cost of Building 10,450,000
3. Cost of Land improvements 72,000
4. Amount to be charged as expense 80,000
5. Total depreciable property and equipment (Building & LI) 10,522,00

PROBLEM 6: DEMOLITION COSTS

On February 1, 2010, Nelson Corporation purchased a parcel of land as a factory site for P200,000.
An old building on the property was demolished for the construction of a new building.
Construction began on a new building which was completed on November 1, 2010. Costs
incurred during this period are listed below:
Demolition of old building P 20,000
Architect's fees 35,000
Legal fees for title investigation and purchase contract 5,000
Construction costs 1,090,000
(Salvaged materials resulting from demolition were sold for P10,000.)
Nelson should record the cost of the land and new building, respectively, as
Land 200,000
Legal fees 5,000
Costs of Land 205,00

Construction costs of Building 1,090,000

Demolitions cost 20,000
Salvaged materials (10,000)
Architect’s fees 35,000
Costs of Building 1,135,000

PROBLEM 7:
On December 1, 2010, Hogan Co. purchased a tract of land as a factory site for P800,000. The old
building on the property was razed, and salvaged materials resulting from demolition were
sold. Additional costs incurred and salvage proceeds realized during December 2010 were as
follows:
Cost to raze old building P70,000
Legal fees for purchase contract and to record ownership 10,000
Title guarantee insurance 16,000
Proceeds from sale of salvaged materials 8,000
In Hogan 's December 31, 2010 balance sheet, what amount should be reported as land?
Purchase costs of Land 800,000
Cost to raze old building 70,000
Proceeds fr. sale of salvaged materials (8,000)
Legal fees 10,000
Title guarantee insurance 16,000
Total Costs of Land 888,000
PROBLEM 8: DECOMISSIONING COST
LIFE co. acquired an oil rig for P200,000,000. Installation and other necessary costs in bringing the
equipment to its intended condition for use totaled P40,000,000. A law requires LIFE Co. to
dismantle the equipment and restore the installation site after 20 years. The estimated
decommissioning cost and restoration costs are P20,000,000. The imputed interest rate is 12 %.

Required: Prepare the journal entry to record the above transaction.

Purchase price 200,000,000

Direct cost 40,000,000
PV of Decommissioning cost (20,000,000 x 0.1036668) 2,073,335
Cost of Equipment 242,073,335

Equipment 242,073,335
Cash 240,000,0000
Asset retirement obligation 2,073,335

PROBLEM 9: EXCHANGE TRANSACTIONS (w/out commercial substance)

Moore Corporation follows a policy of a 10% depreciation charge per year on all machinery and a
5% depreciation charge per year on buildings. The following transactions occurred in 2011:
March 31, 2011— Negotiations which began in 2010 were completed and a warehouse purchased
1/1/02 (depreciation has been properly charged through December 31, 2010) at
a cost of P3,200,000 with a fair market value of P2,000,000 was exchanged for a
second warehouse which also had a fair market value of P2,000,000. The
exchange had no commercial substance. Both parcels of land on which the
warehouses were located were equal in value, and had a fair value equal to book
value.

June 30, 2011— Machinery with a cost of P240,000 and accumulated depreciation through
January 1 of P180,000 was exchanged with P150,000 cash for a parcel of land
with a fair market value of P230,000.

Instructions
Prepare all appropriate journal entries for Moore Corporation for the above dates.

3/31/11 Depreciation Expense 40,000

Accumulated Depreciation—Warehouse 40,000
(P3,200,000 × 5% × 3/12)

Accum. Dep. 1/1/202 – 12/31/2010 = (3,200,000 x 5% x 9 years) = 1,440,000

Warehouse 3,200,000
Less: Accum. Dep. (1/1/2002 – 3/31/2011) 1,480,000
Carrying Value 1,720,000

Warehouse 1,720,000
Accumulated Depreciation—Warehouse 1,480,000
Warehouse 3,200,000
(P3,200,000 × 5% × 9 1/4 = P1,480,000)

6/30/11 Depreciation Expense. 12,000

Accumulated Depreciation—Machinery 12,000
(P240,000 × 10% × 1/2)
 Land 230,000
Accumulated Depreciation—Machinery 192,000
Gain on Exchange 32,000
Machinery 240,000
Cash 150,000
[P80,000 – (P240,000 – P192,000)] = P32,000

PROBLEM 10: EXCHANGE TRANSACTIONS (with & w/out commercial substance)

Beeman Company exchanged machinery with an appraised value of P1,755,000, a recorded cost of
P2,700,000 and Accumulated Depreciation of P1,350,000 with Lacey Corporation for machinery
Lacey owns. The machinery has an appraised value of P1,695,000, a recorded cost of P3,240,000,
and Accumulated Depreciation of P1,782,000. Lacey also gave Beeman P60,000 in the exchange.
Assume depreciation has already been updated.

Instructions
(a) Prepare the entries on both companies' books assuming that the exchange had commercial
substance. (Round all computations to the nearest peso.)
(b) Prepare the entries on both companies' books assuming that the exchange lacked commercial
substance. (Round all computations to the nearest peso.)

(a) Commercial Substance

Beeman
Machinery 1,695,000 Cost P2,700,000
Cash 60,000 A/D 1,350,000
Accum. Depreciation— BV 1,350,000
Machinery 1,350,000 FV 1,755,000
Gain on Exchange of Gain P 405,000
Plant Assets 405,000
Machinery 2,700,000

Lacey
Machinery 1,755,000 Cost P3,240,000
Accum. Depreciation— A/D 1,782,000
Machinery 1,782,000 BV 1,458,000
Gain on Exchange of FV 1,695,000
Plant Assets 237,000 Gain P 237,000
Machinery 3,240,000
Cash 60,000

(b) No Commercial Substance

Beeman
Machinery 1,303,846
Cash 60,000
Accumulated Deprecation—Machinery 1,350,000
Gain on Exchange 13,846
Machinery 2,700,000

P60,000 ÷ (P60,000 + P1,695,000) × P405,000 = P13,846

Lacey
Machinery 1,518,000
Accumulated Depreciation—Machinery 1,782,000
Machinery 3,240,000
Cash 60,000

PROBLEM 11: TRADE-IN

On January 2, 2010, Rapid Delivery Company traded in an old delivery truck for a newer model.
Data relative to the old and new trucks follow:
 Old Truck
Original cost P24,000
Accumulated depreciation as of January 2, 2010 16,000
Average published retail value 7,000
New Truck
List price P40,000
Cash price without trade-in 36,000
Cash paid with trade-in 30,000
What should be the cost of the new truck for financial accounting purposes?
P36,000

PROBLEM 12: ISSUANCE of BONDS

On January 1, 2019, PASSED Co. acquired land with the fair value of P950,000 by issuing a 3-year,
10%, P1,000,000 bonds. Principal is due on January 1, 2022 but interest is due at each year-end. The
prevailing market rate of interest for a similar instrument on January 1, 2019 is 12%. The present
value of the future cash flows from the bonds discounted at 12 % is P951,963.

Required:
1. Prepare the journal entry to record the acquisition of land
Land 950,000
Discount on Notes Payable 50,000
Bonds Payable 1,000,000

2. Prepare the journal entry to record the acquisition of land assuming there’s no fair value of
asset received (land).
Land 951,963
Discount on Notes Payable 48,037
Bonds Payable 1,000,000

Face amount 1,000,000

Pv of Bonds 951,963
Discount on BP 48,037

PROBLEM 13: DONATION

Cheng Company has recently decided to accept a proposal from the City of Bel Aire that publicly
owned property with a large warehouse located on it will be donated to Cheng if Cheng will build a
branch plant in Bel Aire. The appraised value of the property is P490,000 and of the warehouse is
P980,000.

Required: Prepare the entry by Cheng for the receipt of the properties assuming:
1. The donor is from outside the entity
Land 490,000
Warehouse 980,000
Income from donation 1,470,000
2. The donor is a shareholder of Cheng Co.
Land 490,000
Warehouse 980,000
Donated Capital 1,470,000