Modes of Acquisition of Property, Plant and Equipment (PART 1)

1. Cash Basis
Cost = Cash Price equivalent + Direct Attributable Costs
2. Deferred/Installment Basis
Cost = Cash Price equivalent + Directly Attributable Costs

Note:

 The difference between the cash price equivalent and the total payment shall be
recognized as interest expense over the credit period.
 In case the cash price equivalent is not available, compute for the present value of
the future cash flows using an imputed interest.
3. On account with available cash discounts
Cost = Invoice price – Cash Discount whether taken or not
4. Issuance of shares
The property shall be initially measured in the order of priority:
1. Fair value of the property received
2. Fair value of the shares issued
3. Par value or stated value of shares issued.

In case there is an excess of par, the same shall be recognized as share premium.

5. Issuance of bonds
The property shall be initially measured in the order of priority:
1. Fair value of bonds issued.
2. Fair value of the property received.
3. Face value of the bonds issued.

A premium or discount on bonds payable shall be recognized if in case asset is valued at

excess or less than of the face amount.

6. Lump-sum purchase
The lump sum or basket purchase shall be allocated to the individual asset based on
their relative fair value or market value at date of purchase.
7. Exchange
General rule: At fair value of the property received.

In case the acquisition is with commercial substance, the initial cost is:

Fair value of the property given up xx

Add: Amount of cash paid xx
Less: Amount of cash received (xx)
Initial cost xx
Note:
 An exchange is considered to have commercial substance if the future cash
flows significantly change as a result of the exchange transaction.
o If two parties to the exchange experience changes in economic position,
the transaction has a commercial substance.
 Gain or loss on exchange is recognized if the exchange transaction has
commercial substance.

Fair value of property given up xx

Less: Carrying amount of property given up (xx)
Gain (loss) on exchange xx

If the exchange is without commercial substance, the initial cost is:

Carrying value of the property given up xx

Add: Amount of cash paid xx
Less: Amount of cash received (xx)
Initial costs xx
 Note:
 An exchange does not have commercial substance if the future cash flows does
not significantly change as a result of the exchange transaction.
 Gain or loss on exchange is not recognized if the exchange transaction has no
commercial substance.

Illustrative Exercises:

Problem 1

An entity acquired an equipment overseas on cash basis for P100,000. Directly attributable costs
Incurred totaled P40,000.

Required: Prepare the journal entry on the acquisition of the asset.

JOURNAL ENTRY
EQUIPMENT 140,000
CASH 140,000

Problem 2

On January 1, 2021, Alyanna Company purchased an equipment with an installment price of

P65,000 by paying P5,000 down payment and issuing a three-year non-interest bearing note of
P60,000 payable in equal installment starting December 31, 2021. The prevailing rate for the
note as of January 1, 2021 is 12%. -2.402

Required:
1. Assuming the cash price equivalent is P50,000, prepare the journal entry to record the
acquisition of the equipment.

JOURNAL ENTRY
EQUIPMENT 50,000
DISCOUNT ON NP 15,000
NOTES PAYABLE 60,000
CASH 5,000

NOTES PAYABLE 20,000

CASH 20,000

INTEREST EXPENSE 7,500

DISCOUNT ON NOTES PAYABLE 7,500

2. Assuming no cash price equivalent, prepare the journal entry to record the acquisition of the
equipment.

JOURNAL ENTRY
EQUIPMENT 53,040
DISCOUNT ON NP 11,960
NOTES PAYABLE 60,000
CASH 5,000

NOTES PAYABLE 20,000

CASH 20,000

INTEREST EXPENSE 5,760

DISCOUNT ON NOTES PAYABLE 5,760
Problem 3

Carver Company recently acquired two items of equipment:

 Equipment No. 1: Acquired for a press at an invoice price of P1,500,000 subject to a 5% cash
discount which was taken.

JOURNAL ENTRY
EQUIPMENT 1,500,000
ACCOUNTS PAYABLE 1,500,000

ACCOUNTS PAYABLE 1,500,000

CASH 1,425,000
EQUIPMENT 75,000

 Equipment No. 2: Acquired a welding machine at an invoice price of P2,000,000 subject to 1

10% cash discount which was not taken.

EQUIPMENT 2,000,000
CASH 2,000,000

ACCOUNTS PAYABLE 2,000,000

PURCHASE DISCOUNT LOSS 75,000
CASH 2,000,000
EQUIPMENT 75,000

Required: Prepare the journal entries for the acquisition of equipment no. 1 and equipment no.
2.

Problem 4

A plot land is purchased by issuing 25,000 ordinary shares with a P40 par value. The fair market value of
the land was P1,500,000 at the time of acquisition, and the stock was trading at P100 per share.

Required:
a. What is the appropriate journal entry if building is recorded based on it fair value.
LAND 1,500,000
SHARE CAPITAL 1,000,000
SHARE PREMIUM 500,000

b. What is the appropriate journal entry if the building is recorded based in the fair value of
the share capital.
LAND 2,500,000
SHARE CAPITAL 1,000,000
SHARE PREMIUM 1,500,000

c. What is the appropriate journal entry if building is recorded based in the par value of the
share capital.

LAND 1,000,000
SHARE CAPITAL 1,000,000

Problem 5

The purchase of a building is accomplished by issuing bonds with a face value of P4,500,000. The fair
value of the building was P4,800,000 at the time of acquisition, while the quoted price of the bonds was
P4,250,000.

Required:
 a. What is the appropriate journal entry if building is recorded based on the fair value of the
bonds payable?

BUILDING 4,250,000
DISCOUNT ON BONDS PAYABLE 250,000
BONDS PAYABLE 4,500,000

b. What is the appropriate journal entry if the building is recorded based on it fair value?

BUILDING 4,800,000
BONDS PAYABLE 4,500,000
PREMIUM ON BONDS PAYABLE 300,000

c. What is the appropriate journal entry if building is recorded based in the face amount of
bonds payable?

BUILDING 4,500,000
BONDS PAYABLE 4,500,000

Problem 6

The total cost of the land and building is P9,000,000. The land was worth P2,000,000 at the time of
acquisition, while the building was worth P8,000,000.

Required: What should be the cost that will be assigned in each asset?

FV ALLOCATED COST
LAND 2,000,000 2/10 1,800,000
BUILDING 8,000,000 8/10 7,200,000
TOTAL 10,000,000 9,000,000

Problem 7
Sunrise Co. exchanged equipment with Sunset Co. Pertinent data are shown below:
Sunrise Co. Sunset Co.
Equipment 1,000,000 2,000,000
Accumulated Depreciation 200,000 800,000
Fair value 950,000 1,100,000
Cash paid 150,000
Cash received 150,000

Required:
a. Assuming the configuration of cash flows of the equipment are determined to be significantly
different, how much should each company record the asset and what is the gain or loss should they
recognized.
PAYOR (BOOK OF SUNRISE CO.)
FV OF THE ASSET GIVEN 950,000
ADD: CASH PAYMENT 150,000
COST OF NEW ASSET 1,100,000

FV OF ASSET GIVEN 950,000

CV OF THE ASSET 800,000
LOSS/GAIN ON EXCHANGE 150,000

PAYOR (BOOK OF SUNSET CO.)

FV OF THE ASSET GIVEN 1,100,000
LESS: CASH PAYMENT 150,000
COST OF NEW ASSET 950,000

FV OF ASSET GIVEN 1,100,000

CV OF THE ASSET 1,200,000
LOSS/GAIN ON EXCHANGE (100,000)

b. Using the assumption in the preceding item, what should be your journal entries?
PAYOR (BOOK OF SUNRISE CO.)
EQUIPMENT-NEW 1,100,000
ACCUMULATED DEPRECIATION 200,000
EQUIPMENT-OLD 1,000,000
CASH 150,000
GAIN ON EXCHANGE 150,000

PAYOR (BOOK OF SUNSET CO.)

EQUIPMENT-NEW 950,000
ACCUMULATED DEPRECIATION 800,000
CASH 150,000
LOSS ON EXCHANGE 100,000
EQUIPMENT-OLD 2,000,000

c. Assuming the configuration of cash flows of the equipment are determined to be insignificantly
different, how much should each company record the asset and what is the gain or loss should they
recognized.

PAYOR (BOOK OF SUNRISE CO.)

CV OF THE ASSET GIVEN 800,000
ADD: CASH PAYMENT 150,000
COST OF NEW ASSET 950,000

PAYOR (BOOK OF SUNSET CO.)

CV OF THE ASSET GIVEN 1,200,000
LESS: CASH PAYMENT 150,000
COST OF NEW ASSET 1,050,000

d. Using the assumption in the preceding item, what should be your journal entries?

PAYOR (BOOK OF SUNRISE CO.)

EQUIPMENT-NEW 950,000
ACCUMULATED DEPRECIATION 200,000
EQUIPMENT-OLD 1,000,000
CASH 150,000

PAYOR (BOOK OF SUNSET CO.)

EQUIPMENT-NEW 1,050,000
ACCUMULATED DEPRECIATION 800,000
CASH 150,000
EQUIPMENT-OLD 2,000,000

Problem 8

Accordion Company incurred the following expenditures in 2014:

Purchase of land P7,892,000

Land survey 104,000
Fees for search of title for land 12,000
Building permit fee 70,000
Temporary quarters for construction crews 215,000
Cost to demolish old building 940,000
Excavation of basement 200,000
Special assessment for street project 40,000
Dividends 100,000
Damages awarded for injuries sustained in
construction (no insurance carried) 168,000
Cost of construction 58,000,000
 Cost of paving parking lot adjoining building 800,000
Cost of shrubs, trees and other landscaping 660,000

A portion of the building site had been temporarily used by Accordion to operate a car park while the
building was constructed. A total of P325,000 was earned by Accordion from this incidental activity.

Required: Compute for the costs of land, land improvement, and building, respectively.

COSTS OF LAND

PUCHASE OF LAND 7,892,000

FEES FOR SEARCH OF TITLE FOR LAND 12,000

COSTS OF LAND IMPROVEMENT

LAND SURVEY

SPECIAL ASSESSMENT FOR STREET PROJECT

COST OF SHRUBS, TREES AND OTHER LANDSCAPING

Cost of paving parking lot adjoining building

COSTS OF BUILDING

BUILDING PERMIT FEE

TEMPORARY QUARTERS FOR CONSTRUCTION CREWS

COST TO DEMOLISH OLD BUILDING

DAMAGES AWARDED FOR INJURIES SUSTAINED IN CONSTRUCTION (NO INSURANCE CARRIED)

COST OF CONSTRUCTION

EXCAVATION OF BASEMENT