Financial Accounting and Reporting

COVID – 19 PROJECT FOR ACCOUNTANTS

FINANCIAL ACCOUNTING AND REPORTING

PROPERTY, PLANT AND EQUIPMENT

DEFINITION
Property, plant and equipment are tangible items that:
a. Are held for use in the production or supply of goods or services, for rental to others,
or for administrative purposes; and
b. Are expected to be used during more than one period.

RECOGNITION
Items of property, plant, and equipment should be recognized as assets when it is
probable that:
The future economic benefits associated with the asset will flow to the enterprise; and
The cost of the asset can be measured reliably.

VALUATION

A. Measurement at Recognition
An item of property, plant and equipment that qualifies for recognition, as an asset
shall be measured at its cost.

B. Measurement after Recognition

The entity shall choose between
a. Cost model - Cost less any accumulated depreciation and accumulated
impairment loss.
b. Revaluation model - revalued amount, being the fair value at the date of
revaluation, less any subsequent accumulated depreciation and subsequent
accumulated impairment loss.

Elements of Cost
The cost of an item of property, plant and equipment comprises:
a. Its purchase price, including import duties and non-refundable purchase taxes,
after deducting trade discounts and rebates.
b. Any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by
management. Examples of directly attributable costs are: (TIPPED)
✓ Costs of Employee benefits arising directly from the construction or
acquisition of the item of property, plant and equipment
✓ Costs of site Preparation
✓ Initial Delivery and handling costs
✓ Installation and assembly costs
✓ Professional fees
✓ Costs of Testing whether the asset is functioning properly,
Under the amendments, proceeds from selling items before the related item
of PPE is available for use should be recognized in profit or loss, together
with the costs of producing those items.
c. The initial estimate of the costs of dismantling and removing the item and
restoring the site on which it is located, the obligation for which an entity incurs
either when the item is acquired or as a consequence of having used the item
during a particular period for purposes other than to produce inventories during
that period.

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Financial Accounting and Reporting
Examples of costs that are not costs of an item of property, plant and
equipment and should be expensed:
a. Costs of opening a new facility
b. Costs of introducing a new product or service (including costs of advertising and
promotional activities)
c. Costs of conducting business in a new location or with a new class of customer
(including costs of staff training)
d. Administration and other general overhead costs.

Recognition of costs in the carrying amount of an item of property, plant and equipment
ceases when the item is in the location and condition necessary for it to be capable of
operating in the manner intended by management. Therefore, costs incurred in using or
redeploying an item are not included in the carrying amount of that item.
For example, the following costs are not included in the carrying amount of an item of
property, plant and equipment:
a. Costs incurred while an item capable of operating in the manner intended by
management has yet to be brought into use or is operated at less than full capacity
b. Initial operating losses, such as those incurred while demand for the item’s output
builds up
c. Costs of relocating or reorganizing part or all of an entity’s operations.

ACCOUNTING FOR ACQUISITIONS – Measurement of cost

A. Measurements that use the cash price or its equivalent
Acquired through cash The amount of cash paid
basis
Acquired through short Cost should be net of the discount regardless
term credit whether taken or not
Acquired through long ✓ The cash price shall be used
term financing ✓ The present value of the deferred payment or the
installments shall be used

B. Measurements with an order of priority to be followed:

Exchange (with
Issuance of shares Issuance of bonds
commercial substance)
1st FV of Asset FV of Bonds FV of Asset Given
nd
2 FV of Shares FV of Asset FV of Asset Received
3rd Par value of Shares Face value of BP BV of Asset Given
NOTE: Assets acquired by an exchange transaction shall be adjusted for the amount
of cash paid or received.

C. Measurements at fair value of the asset received only

Asset donated by Recorded at the fair value of the asset. An equity account
a shareholder “Donated Capital” shall be credited which is part of share
premium.

However, cost incurred to transfer the title paid by the

recipient shall not be capitalized, instead debited from
Donated Capital.
Asset from a Also recorded at fair value. Income shall be credited if there
government grant are no conditions attached and cost incurred to transfer the
title shall be recognized as an expense.

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Financial Accounting and Reporting
D. Other measurement considerations
Acquisition of two or The acquisition cost shall be allocated to acquired
more items of PPE items based on their relative fair market values.
Self-Constructed asset Includes the cost of materials, direct labor and
overhead specifically attributable to the construction.
Savings from the construction, meaning lower total
cost compared if the assets was purchased are not
included in the cost and shall not be recognized as
income.
Exchange transactions Measured at book value of the asset given.
that lacks commercial
As a result, NO “gain or loss” is to be recognized.
substance

PROBLEM SOLVING
1. Nielsen Company acquired a welding machine with an invoice price of P3,000,000
subject to a cash discount of 5% which was not taken. Nielsen incurred freight and
insurance during shipment of P50,000 and testing and installation cost of P200,000.
Nielsen also incurred cost of P20,000 in removing the old welding machine prior to
the installation of the new one. Welding supplies were acquired at a cost of
P100,000. The VAT on the acquisition is P360,000. What is the cost of the new
welding machine?
A. 3,100,000
B. 3,220,000
C. 3,250,000
D. 3,400,000

2. Nassie Company acquired two items of machinery as follows:

➢ On December 30, 2019, Nassie Company purchased a machine in exchange for
a non-interest- bearing note requiring three payments of P1,000,000. The first
payment was made on December 30, 2020, and the others are due annually on
December 30. The prevailing rate of interest for this type of note at date of
issuance was 12%. The present value of an ordinary annuity of 1 at 12% is 1.69
for two periods and 2.40 for three periods. The new machine was damaged
during its installation and the repair cost amounted to P50,000.
➢ On January 1, 2019, Nassie Company acquired used machinery by issuing the
seller a three-year, noninterest-bearing note for P4,000,000. In recent borrowing,
Nassie has paid a 12% interest for this type of note. The present value of 1 at
12% for 3 years is .71.
What is the total cost of both machines?
A. 4,530,000
B. 4,580,000
C. 4,820,000
D. 5,240,000

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Financial Accounting and Reporting
3. Nerissa Company purchased new machinery on account as well as incurring the
following cost:
Invoice price of the machinery 3,000,000
Cash discount not taken on the purchase 150,000
Freight on new machine 50,000
Insurance during freight 40,000
Cost of moving old machinery to a new location 5,000
Installation cost of new machine 30,000
Testing cost before new machine before new machine was put into 80,000
regular operation
Operating cost during the first month of regular use 300,000

The total cost to be capitalized as part of the new machinery is

A. 2,960,000
B. 2,970,000
C. 3,050,000
D. 3,260,000

4. In December 2019, Nash Company exchanged an old machine, which cost

P6,000,000 and 50% depreciated, for a used machine and paid a cash difference of
P1,500,000. There is a substantial difference with the cash flows associated to both
machines exchanged. The fair value of the old machine was determined to be
P2,000,000. What is the cost of the new machine to Nash?
A. 2,000,000
B. 3,000,000
C. 3,500,000
D. 6,000,000

5. Berry Motor Sales exchanged a car from its inventory for a computer to be used as a
noncurrent operating asset. The following information relates to this exchange that
took place on July 31, 2019:
Carrying amount of the car P 300,000
Listed selling price of the car 450,000
Fair value of the computer 430,000
Cash difference paid by Berry 50,000

On July 31, 2019, how much is the gain that should be recognized by Berry on this
exchange?
A. 0
B. 80,000
C. 100,000
D. 130,000

6. Ricardo Company and Leonardo Company are fuel oil distributors. To facilitate the
delivery of oil to customers, Ricardo and Leonardo exchanged ownership of 5,000
barrels of oil without physically moving the oil. Ricardo paid Leonardo P2,000,000 to
compensate for a difference in the grade of oil. It was reliably determined that the
exchange lacks commercial substance because the configuration of the cash flows
of the asset received does not differ from the configuration of the cash flows of the
asset transferred. On the date of exchange, cost and fair value of oil were:
Ricardo Company Leonardo Company
Cost 45,000,000 40,000,000
Fair value 51,000,000 53,000,000

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Financial Accounting and Reporting
Ricardo should record the oil inventory received in exchange at
A. 45,000,000
B. 47,000,000
C. 51,000,000
D. 53,000,000

Use the following to answer the next five questions

Presented below is information related to Corleone Company:
A. Corleone made the following individual cash purchases:
Land and building P 6,000,000
Machinery and office equipment 1,800,000
Delivery equipment 500,000

The question of apportioning the cost of the purchases between the assets arose.
An appraisal was made which disclosed the following values:
Land P 1,000,000
Building 3,000,000
Machinery 800,000
Office equipment 400,000
Delivery equipment 350,000

B. Corleone acquired the assets of Realist Company, which had discontinued

operations. The fair values of the property are:
Land P 1,000,000
Building 5,000,000
Machinery 2,000,000

Corleone Company gave 60,000 shares of its P100 par value ordinary shares in
exchange. The shares had a quoted price of P200 per share on that date of
purchase of the property.

C. A shareholder gave the company a piece of land as a plant site. The fair value of
this land is determined to be P2,000,000. Corleone spent an additional P50,000 to
transfer the title.

D. The company paid cash for a machinery, P900,000 subject to 5% cash discount,
and freight on machinery, P35,000. Installation and testing cost of 200,000. The
discount was not taken by Corleone.

E. The company acquired furniture and fixtures by issuing a P400,000 two year
payable in lump sum non-interest-bearing note. In a similar transaction, the
company has paid 12% interest. The present value of 1 at 12% for 2 years is .797,
and the present value of an annuity due of 1 at 12% for 2 years is 1.69.

7. How much is the cost of the machinery in Corleone’s cash purchase?

A. 1,800,000
B. 1,200,000
C. 1,000,000
D. 800,000

8. How much is the cost of the building in Corleone’ purchase by issuing shares?
A. 5,000,000
B. 2,000,000
C. 1,500,000
D. 1,000,000

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Financial Accounting and Reporting
9. How much is the cost of the land in donated by the shareholder to Corleone?
A. 2,050,000
B. 2,000,000
C. 1,950,000
D. 0

10. How much is the cost of the machinery acquired by Corleone on account?
A. 1,135,000
B. 1,090,000
C. 935,000
D. 855,000

11. How much is the cost of the furniture and fixtures by Corleone by issuing a
promissory note?
A. 800,000
B. 676,000
C. 400,000
D. 318,800

BORROWING COST
Borrowing Cost Interest and other costs incurred by an enterprise in connection with
the borrowing of funds. Borrowing cost may include:
Interest expense calculated using the effective interest method.
Finance charges in respect of finance leases
Exchange differences arising from foreign currency borrowings to
the extent that they are regarded as an adjustment to interest costs.
Qualifying Asset An asset that takes a substantial period of time to get ready for its
intended use. Examples include:
Inventories
Manufacturing plants
Power generation facilities
Intangible assets
Investment properties.

Financial assets, and inventories that are manufactured, or

otherwise produced, over a short period of time, are not qualifying
assets. Assets that are ready for their intended use or sale when
acquired are not qualifying assets.

Accounting Treatment
The revised PAS 23 has specifically mentioned that interest on loans applied to
qualifying assets should be capitalized. This eliminates the benchmark and alternative
treatment.

Borrowing Costs Eligible for Capitalization

A. Specific Borrowings
To the extent that funds are borrowed specifically for the purpose of obtaining a
qualifying asset, the amount of borrowing costs eligible for capitalization on that
asset shall be determined as the actual borrowing costs incurred on that
borrowing during the period less any investment income on the temporary
investment of those borrowings.

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Financial Accounting and Reporting
B. General Borrowings
To the extent that funds are borrowed generally and used for the purpose of
obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization
shall be determined by applying a capitalization rate to the expenditures on that
asset. The capitalization rate shall be the weighted average of the borrowing costs
applicable to the borrowings of the entity that are outstanding during the period,
other than borrowings made specifically for the purpose of obtaining a qualifying
asset. The amount of borrowing costs capitalized during a period shall not exceed
the amount of borrowing costs incurred during that period.

Accounting issues related to capitalization

Commencement of The capitalization of borrowing costs, as part of the cost of a
Capitalization qualifying asset shall commence when:
a. Expenditures for the asset are being incurred
b. Borrowing costs are being incurred
c. Activities that are necessary to prepare the asset for its
intended use or sale are in progress.
Suspension of Capitalization of borrowing costs shall be suspended during
Capitalization extended periods in which active development is interrupted.
Cessation of Capitalization of borrowing costs shall cease when substantially
Capitalization all the activities necessary to prepare the qualifying asset for its
intended use or sale are complete. When the construction of a
qualifying asset is completed in parts and each part is capable of
being used while construction continues on other parts,
capitalization of borrowing costs shall cease when substantially
all the activities necessary to prepare that part for its intended
use or sale are completed.

Disclosure Requirements
The financial statements shall disclose:
a. The accounting policy adopted for borrowing costs;
b. The amount of borrowing costs capitalized during the period; and
c. The capitalization rate used to determine the amount of borrowing costs eligible
for capitalization.

PROBLEM SOLVING
1. Nitz Company entered into a P10,000,000 fixed contract with Constructors Company
on January 1, 2019 for the construction of a new building. On January 1, 2019, Nitz
obtained a loan of P10,000,000 at an interest rate of 12% to finance specifically the
construction. Availment from the loan may be made quarterly at unequal amounts.
Actual interest incurred for 2019 was P900,000. Prior to their disbursement, the
proceeds from the loan were temporarily invested and earned interest income of
P50,000. The building was completed on December 31, 2019. Additional costs
incurred during the construction were P200,000 for plans, specifications and
blueprint, and P350,000 for architectural design and supervision. What is the cost of
the building?
A. 11,450,000
B. 11,400,000
C. 10,550,000
D. 10,000,000

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Financial Accounting and Reporting
2. Niña Company had the following loans outstanding during the years 2018 and 2019:
Specific construction loan P 2,000,000 10%
General loan 15,000,000 12%

The company began self-construction of a building on January 1, 2018 and was

completed on December 31, 2019. The following expenditures were made during
2018 and 2019:
January 1, 2018 P 2,000,000
July 1, 2018 4,000,000
November 1, 2018 3,000,000
July 1, 2019 1,000,000
P 10,000,000
What is the total cost of the building on December 31, 2019?
A. 11,700,000
B. 11,660,000
C. 10,840,000
D. 10,000,000

3. Norla Company had the following outstanding loans during 2018 and 2019:
Specific construction loan P 3,000,000 10%
General loan 25,000,000 12%

Norla Company began the self-construction of a new building on January 1, 2018

and building was completed on September 30, 2019. The following expenditures
were made in 2018 and 2019:
January 1, 2018 P 4,000,000
April 1, 2018 5,000,000
December 1, 2018 3,000,000
July 1, 2019 6,000,000

What is the total cost of the new building on September 30, 2019?
A. 18,700,000
B. 18,900,000
C. 20,196,000
D. 20,260,000

4. The third year of a construction project began with a P30,000,000 balance in

Construction in Progress. Included in that figure is 6,000,000 of interest capitalized
in the first two years. Construction expenditures during the third year were
P80,000,000 which were incurred evenly throughout the entire year. The company
has had over P300,000,000 in interest-bearing debt outstanding the third year, at a
weighted average rate of 9 percent. How much interest for the third year is
capitalized?
A. 3,600,000
B. 6,300,000
C. 9,360,000
D. 9,900,000

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Financial Accounting and Reporting
SPECIFIC COSTS OF PROPERTY, PLANT, AND EQUIPMENT
LAND
Costs chargeable to land include the following (DSTOP2 BER2T LCM):
a. Draining cost and filling the land.
b. cost of Survey
c. unpaid Taxes up to the date of acquisition assumed by the buyer
d. cost of Option to buy the acquired land. if the land is not acquired, the cost of
option is expensed outright
e. Purchase price
f. cost of Permanent improvement (cost of grading, leveling, filling)
g. Broker’s commission
h. Escrow fees on the land
i. cost of Relocation or reconstruction of property belonging to others in order to
acquire possession
j. fees for Registration and transfer of title
k. payments to Tenants to induce them to vacate the premises
l. Legal fees and other expenditures for establishing clean title
m. cost of Clearing unwanted old structures, less proceeds from salvage
n. Mortgages, encumbrances and interest on such mortgages assumed by buyer

Treatment of land improvements

Improvements Examples Treatment
Non- cost of: surveying, clearing grading and ✓ Land
depreciable leveling, subdividing.
Depreciable fences, water systems, drainage ✓ Building if part of
systems, sidewalks and pavements, blueprint of the building
landscaping. ✓ Land improvements if
not part

BUILDING
Costs chargeable to building when purchased (PLIRT2)
a. Purchase price
b. Legal fees and other expenses incurred in connection with the purchase
c. Interest, liens and other encumbrances on the building assumed by the buyer
d. any Renovating or remodeling costs incurred to put a building purchased in a
condition suitable for its intended use such as lighting installations, partitions and
repairs
e. unpaid Taxes up to the date of acquisition assumed by the buyer
f. payments to Tenants to induce them to vacate the premises

Cost of building when constructed (SPAM PD2ET)

a. Superintendent fee
b. building Permit and license
c. Architect fee
d. Manufacturing cost (materials, labor employed and overhead incurred during the
construction
e. expenditures for service equipment and fixtures made a Permanent part of the
structure
f. expenditures incurred During the construction period such as interest on
construction loans and insurance
g. cost of Demolishing old building old structures, less proceeds from salvage
h. cost of Excavation
i. cost of temporary buildings used as construction offices and tools or materials
shed
Note: Any savings (gain) or additional costs (loss) from construction shall not be
recognized.

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Financial Accounting and Reporting
Treatment of Building fixtures
Fixtures Treatment
Immovable ✓ Building
Movable ✓ Furniture and fixtures and depreciated over their useful
life

Cost of a new building constructed on the site of a previous building

Acquisition of land and building
1. Building is unusable and Purchase price is allocated entirely to the land (including
likely to be demolished demolition cost)
right away.
2. Building is usable and Allocate the purchase price to the land and building
the company will use it based on the relative fair values.
for a while
a. PPE The land and building will be classified as two separate
items under Plant, Property and Equipment measured at
their allocated cost determined using the relative fair
value method.
b. Inventory The land and building will be classified as one item under
Inventories.
c. Investment Property-
subsequently
measured at:
Fair value model the land and building will be classified as one item under
Investment Property
Cost Model the land and building will be classified as two separate
items under Investment Property at their allocated cost
determined using the relative fair value

Treatment of Demolition Costs

The entity acquired the property in the current reporting period, with the intention of
demolishing the old building and replacing it with a new building. The entity will not use
the old building prior to its demolition. New building will be used as:
Investment
PPE Inventory
Property
Carrying Charged to loss Capitalized as inventory Charged to loss
value of the on retirement on retirement
old building
Cost of new Construction cost Allocated carrying value of Construction cost
building plus demolition the old building plus plus demolition
cost Construction cost and cost
demolition cost

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Financial Accounting and Reporting
MACHINERY
Cost of Machinery when purchased (SWAC PIFIT FUD):
a. nonrefundable Sales tax
b. cost of Water device to keep machine cool
c. cost of Adjustment to machinery for operational efficiency and to increase
capacity
d. Construction of base (cost of safety rail and platform surrounding machine)
e. Purchase price
f. Insurance while in transit
g. Freight, handling, storage and other cost related to the acquisition
h. Installation cost, including site preparation and assembling
i. cost of Testing and trial run, and other cost necessary in preparing the machinery
for use
j. Fees paid to consultants for advice on acquisition of the machinery
k. Unloading charges
l. initial estimate of cost of Dismantling and removing the machinery and restoring
the site on which it is located

Treatment of old installation cost

a. machinery is moved to new location – The undepreciated old installation cost is
expensed. New installation cost is charged to the NEW asset.
b. machinery is removed and retired – The undepreciated old installation cost is
expensed. New Installation cost is charged to the NEW asset. (in addition, the
removal cost is also charged to expense.)

PROBLEM SOLVING
Use the following to answer the next two questions
The following expenditures were incurred by Pinky Company in 2019:
Purchase of land with existing building 10,500,000
Fair value of old building 500,000
Land survey 400,000
Fees for title search for title of land 300,000
Building permit 250,000
Temporary quarters for construction crews 100,000
Payments of tenants of old building for vacating the premises 600,000
Payment to demolition company to raze the old building and clean up 400,000
Excavating basement 350,000
Special assessment tax for street project 60,000
Salvage value of materials from old building 110,000
Damages awarded for injuries sustained in construction 90,000
Costs of construction 20,000,000
Cost of paving parking lot adjoining the building 180,000
Cost of shrubs, trees and other landscaping 40,000

1. What is the cost of the land?

A. 11,860,000
B. 11,750,000
C. 11,690,000
D. 10,760,000

2. What is the cost of the building?

A. 21,590,000
B. 20,970,000
C. 20,880,000
D. 20,700,000

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Financial Accounting and Reporting
Use the following to answer the next two questions
Land and an old building were acquired from a seller by Casio Company at 4,000,000
as the new location for an expansion office south of Metro Manila. The old building had
a fair value of P500,000. The old building was also demolished at the end of the
reporting period at a cost of P100,000. Other cost incurred in connection with the land,
applicable taxes and other cost before construction of the expansion office are as
follows:
Title search and insurance 200,000
Documentary stamp tax 70,000
Transfer Tax 25,000
Land registration fees 15,000
Construction materials purchased in advance for construction 2,000,000
Proceeds of scrap from old building 30,000
Perimeter fencing 50,000
Cost of signage and other land improvements 140,000
Cost of drainage works and plumbing before construction 150,000
Filling, leveling and landscaping 300,000

3. What is the total cost of the land?

A. 4,410,000
B. 4,160,000
C. 4,110,000
D. 3,800,000

4. What is the total cost of the land improvements?

A. 640,000
B. 560,000
C. 490,000
D. 190,000

5. Paula Company has purchased land in Quezon City for construction of buildings to
be held for sale in the ordinary course of business. The following costs were incurred
in purchasing the property and constructing the building:
Land and building purchase price 2,500,000
Fair value of the old building on the land 300,000
Payment of delinquent property taxes 100,000
Title search and insurance 50,000
Special assessment for city improvements water and sewer 150,000
Building permit 30,000
Cost to destroy existing building (P10,000 worth of salvaged material
sold as scrap) 60,000
Contract cost of new building 7,000,000
Land improvements 500,000
Sidewalks and parking lot 200,000

The depreciated value of the old building on the books of the company from which
the land was purchased was P300,000. The old building was never used by Paula.

What is the cost of the land and building as inventory?

A. 9,880,000
B. 10,280,000
C. 10,430,000
D. 10,580,000

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Financial Accounting and Reporting
Use the following to answer the next two questions
Razor Company, a newly formed corporation, incurred the following expenditures
related to land and building:
Cost of land, which included an old apartment building appraised at 3,000,000
P500,000
Fee for title search 100,000
Payment to tenants for vacating old building 500,000
Payment for delinquent property taxes assumed by the purchaser 200,000
Removal of apartment building 50,000
Salvaged materials retained by the demolition company 10,000
Cost of grading, leveling and other landscaping 150,000
Architect fees on new building 200,000
Payment to building contractors 10,000,000
Interest cost on specific borrowing incurred during construction 500,000
Payment of medical bills of employees accidentally injured while
inspecting building construction 180,000
Cost of paving driveway and parking lot 40,000
Fences surrounding the property 20,000
Cost of installing lights in the parking lot 50,000
Premium for insurance on the building during construction 250,000
Cost of open house party to celebrate opening of new building 60,000
6. What is the cost of the land?
A. 2,950,000
B. 3,000,000
C. 3,450,000
D. 4,000,000

7. What is the cost of the building?

A. 10,000,000
B. 10,950,000
C. 10,990,000
D. 11,500,000

8. Paula Company has decided to expand its operations and has purchased land with
a dilapidated building in Quezon City for construction of a new manufacturing plant.
The following costs were incurred in purchasing the property and constructing the
building:
Land purchase price 2,500,000
Payment of delinquent property taxes 100,000
Title search and insurance 50,000
Special assessment for city improvements for water and sewer 150,000
Building permit 30,000
Cost to destroy existing building (P10,000 worth of salvaged material
used in new building) 60,000
Contract cost of new building 7,000,000
Land improvements 500,000
Sidewalks and parking lot 200,000
Fire insurance on building – 1 year 40,000
The depreciated value of the old building on the books of the company from which
the land was purchased was P300,000. The old building was never used by Paula.
What is the cost of the land?
A. 3,050,000
B. 2,850,000
C. 2,800,000
D. 2,700,000

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Financial Accounting and Reporting

9. During the current year, Nelly Company purchased a second hand machine at a
price of P3,200,000. A cash payment of P500,000 was made and a two-year, non-
interest-bearing note was issued for the balance of P2,700,000. Recent transaction
involving similar machinery indicate that the used machine has a second hand
market value of P2,400,000. A new machine would cost P4,000,000. The following
costs were incurred during the year:
Cost of removing old machine that is replaced 30,000
Cash proceeds from the sale of the old machine replaced 10,000
General overhaul and repairs to recondition machine prior to use 150,000
Cost of spare parts to cover breakdowns 200,000
Cost of installation 80,000
Cost of testing machine prior to use 110,000
Cost of hauling the machine from vendor to company premises 10,000
Cost of repairing damage to machine caused when the machine was
dropped during installation 30,000
Repairs incurred during the first year of operation 90,000
Safety device added to the machine 250,000
Cost of training workers to operate the machine 20,000

What is the amount to be capitalized as cost of the machine?

A. 3,000,000
B. 3,120,000
C. 3,550,000
D. 3,800,000

10. Nora Company uses many kinds of machines in its operation. The company
constructs some of these machines itself and acquires others from manufacturers.
The following information relates to a machine that was acquired on January 1,
2019.
Cash paid for machine, including VAT of P96,000 896,000
Cost of transporting machine 30,000
Labor cost of installment by expert fitter 50,000
Labor cost of testing machine 40,000
Insurance cost for 2019 15,000
Cost of training for personnel who will use the machine 25,000
Cost of safety rails and platform surrounding the machine 60,000
Cost of water device to keep the machine cool 80,000
Cost of adjustment to machine to make it operate more efficiently 75,000

How much should be capitalized as cost of the machine?

A. 1,231,000
B. 1,160,000
C. 1,150,000
D. 1,135,000

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Financial Accounting and Reporting
DEPRECIATION
Carrying amount The amount at which an asset is recognized after deducting any
accumulated depreciation and accumulated impairment losses.
Cost The amount of cash or cash equivalents paid or the fair value of
the other consideration given to acquire an asset at the time of its
acquisition or construction or, where applicable, the amount
attributed to that asset when initially recognized in accordance
with the specific requirements of other IFRS.
Depreciable The cost of an asset, or other amount substituted for cost, less its
amount residual value.
Depreciation The systematic allocation of the depreciable amount of an asset
over its useful life.
Residual value The estimated amount that an entity would currently obtain from
disposal of the asset, after deducting the estimated costs of
disposal, if the asset were already of the age and in the condition
expected at the end of its useful life.
Useful life (a) The period over which an asset is expected to be available
for use by an entity; or
(b) The number of production or similar units expected to be
obtained from the asset by an entity.

Depreciation
➢ 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.
➢ The depreciation charge for each period shall be recognized in profit or loss unless it
is included in the carrying amount of another asset for example depreciation on
factory equipment which shall be included as overhead and cost of inventories.

Depreciable Amount and Depreciation Period

➢ The depreciable amount of an asset shall be allocated on a systematic basis over its
useful life.
➢ The residual value and the useful life of an asset shall be reviewed at least at each
financial year-end and, if expectations differ from previous estimates, the change(s)
shall be accounted for as a change in an accounting estimate
➢ Depreciation is recognized even if the fair value of the asset exceeds its carrying
amount; as long as the asset’s residual value does not exceed its carrying amount.
Repair and maintenance of an asset do not negate the need to depreciate it.
➢ The residual value of an asset may increase to an amount equal to or greater than
the asset’s carrying amount. If it does, the asset’s depreciation charge is zero
unless and until its residual value subsequently decreases to an amount below the
asset’s carrying amount.
➢ Depreciation of an asset begins when it is available for use. Depreciation of an
asset ceases at the earlier of the date that the asset is classified as held for sale and
the date that the asset is derecognized. Therefore, depreciation does not cease
when the asset becomes idle or is retired from active use unless the asset is fully
depreciated. However, under usage methods of depreciation the depreciation
charge can be zero while there is no production.
➢ Factors are considered in determining the useful life of an asset:
a. Expected usage of the asset. Usage is assessed by reference to the asset’s
expected capacity or physical output.
b. Expected physical wear and tear, which depends on operational factors such as
the number of shifts for which the asset is to be used and the repair and
maintenance program, and the care and maintenance of the asset while idle.

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c. Technical or commercial obsolescence arising from changes or improvements in
production, or from a change in the market demand for the product or service
output of the asset.
d. Legal or similar limits on the use of the asset, such as the expiry dates of related
leases.

Depreciation Method
➢ The depreciation method used shall reflect the pattern in which the asset’s future
economic benefits are expected to be consumed by the entity.
➢ The depreciation method applied to an asset shall be reviewed at least at each
financial year-end and, if there has been a significant change in the expected pattern
of consumption of the future economic benefits embodied in the asset, the method
shall be changed to reflect the changed pattern. Such a change shall be accounted
for as a change in an accounting estimate
➢ A variety of depreciation methods can be used to allocate the depreciable amount of
an asset on a systematic basis over its useful life. These methods include the
straight-line method, the diminishing balance method and the units of production
method.

KEY OBSERVATIONS
➢ SL provides uniform depreciation, SYD and Double-declining provides accelerated
and declining depreciation while production provides variable amount of
depreciation.
➢ SL, SYD and Production method uses depreciable amount from beginning to end.
Double declining ignores the residual value in the initial year and depreciates the
book value after that, but still adheres to the depreciation of the depreciable amount
only.
➢ Depreciation for SYD and Double-Declining for a portion of a year is computed by
multiplying the amount of depreciation by the number of month’s outstanding divided
by 12.

PROBLEM SOLVING
1. During 2016, Beagle Company purchased an equipment with a cost of P1,500,000.
It is expected that this equipment will be used for 5 years and have a residual value
at the end of its useful life of P300,000. It is also expected that this equipment can
produce 200,000 units of Beagle’s products. Beagle’s policy is to take a full year’s
depreciation in the year of acquisition. In 2016, 2017 and 2018, this equipment
produced 50,000, 30,000 and 40,000 units respectively. Beagle sold the equipment
on January 1, 2019 for net proceeds of P900,000. What is the gain on sale
recognized in 2019?
A. 500,000
B. 320,000
C. 240,000
D. 120,000

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Financial Accounting and Reporting
2. A schedule of plant assets owned by Oren Company is presented below.
Cost Scrap Depreciable cost Life Annual Depreciation
Building 8,800,000 800,000 8,000,000 20 years 400,000
Machinery 3,200,000 320,000 2,880,000 15 years 192,000
Equipment 640,000 640,000 5 years 128,000
Total 12,640,000 11,520,000 720,000

Oren computes depreciation on the straight-line method. The composite life of the
assets should be
A. 19.8
B. 18.0
C. 16.0
D. 13.3

3. Ollen Company uses the composite method of depreciation and has a composite
rate of 25%. During 2019, it sold assets with an original cost of P500,000 and a
residual value of P100,000 for P300,000 and eventually acquired P900,000 of new
assets with a residual value of P150,000. Information regarding the original group of
assets as of January 1, 2019 is presented below:

Total cost 5,000,000

Total residual value 800,000
Accumulated depreciation 1,000,000

What was the depreciation expense recorded by Ollen Company in 2019?

A. 1,000,000
B. 1,100,000
C. 1,312,500
D. 1,350,000

4. On April 1, 2018, Ofelia Company bought machinery under a contract that required a
down payment of P500,000 plus 24 monthly payments of P300,000 for total
payments of P7,700,000. The cash price of the machinery was P6,500,000. The
machinery has an estimated useful life of four years and estimated residual value of
P500,000. Ofelia uses SYD method of depreciation. In its 2019 income statement,
what amount should Ofelia report as depreciation for this machinery?
A. 1,800,000
B. 1,950,000
C. 2,275,000
D. 2,400,000

5. On January 1, 2019, Tiger Company acquired equipment to be used in its

manufacturing operations. The equipment has an estimated useful life of 5 year and
an estimated residual value of P200,000. The depreciation applicable to this
equipment was P900,000 for 2021 computed under the sum of years’ digits method.
What was the acquisition cost of the equipment?
A. 4,300,000
B. 4,500,000
C. 4,700,000
D. 5,000,000

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Financial Accounting and Reporting
6. Lily Company purchased an equipment for P4,000,000 with a useful life of 5 years
and a residual value of P500,000 on July 1, 2019. Lily opted to depreciate this asset
using the double declining balance method of depreciation and did not foresee any
changes in its estimate to occur. What is the depreciation expense on this
equipment for the calendar year ended December 31, 2020?
A. 800,000
B. 960,000
C. 1,280,000
D. 1,600,000

7. On January 1, 2017, Ozzie purchased a large quantity of laptop computers for their
associates. The cost of these computers was P10,000,000. On the date of purchase,
the management estimated that the computers would last approximately 6 years and
would have a residual value at that time of P550,000. The company used the sum-
of-years’ digit method of depreciation. During 2019, the management realized that
technological advancements and the volume of files being uploaded had made the
computers virtually obsolete and that they would have to be replaced sooner.
Management decided to depreciate the computers using the double declining
balance method of depreciation with no change in useful life and residual value.
What is the depreciation to be recognized for the year 2019?
A. 1,125,000
B. 1,683,333
C. 2,250,000
D. 2,525,000

GOVERNMENT GRANTS AND GOVERNMENT ASSISTANCE

Definitions
Government Action by government designed to provide an economic benefit
assistance specific to an entity or range of entities qualifying under certain
criteria. Government assistance for the purpose of this Standard
does not include benefits provided only indirectly through action
affecting general trading conditions, such as the provision of
infrastructure in development areas or the imposition of trading
constraints on competitors.
Government Assistance by government in the form of transfers of resources to an
grants entity in return for past or future compliance with certain conditions
relating to the operating activities of the entity. They exclude those
forms of government assistance which cannot reasonably have a
value placed upon them and transactions with government which
cannot be distinguished from the normal trading transactions of the
entity.
Grants related Government grants whose primary condition is that an entity
to assets qualifying for them should purchase, construct or otherwise
acquire long-term assets. Subsidiary conditions may also be
attached restricting the type or location of the assets or the periods
during which they are to be acquired or held.
Grants related Government grants OTHER than those related to assets.
to income

RECOGNITION
Government Grants, including non-monetary grants at fair value, shall not be
recognized until there is reasonable assurance that:
a. The entity will comply with the conditions attaching to them; and
b. The grants will be received.

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There are four types of significant government grants that will require the following
treatment:
1. Grants for the purpose of specific expenses – This should be deferred and
recognized as income in the same period as the relevant expense.
2. Grants related to depreciable assets are usually recognized as income over the
periods and in the proportions in which depreciation on those assets is charged.
Either by deducting the grant from the cost of the asset or as deferred income.
3. Grants related to non-depreciable assets may also require the fulfillment of
certain obligations and would then be recognized as income over the periods which
bear the cost of meeting the obligations. As an example, a grant of land may be
conditional upon the erection of a building on the site and it may be appropriate to
recognize it as income over the life of the building.
4. A government grant that becomes receivable as compensation for expenses or
losses already incurred or for the purpose of giving immediate financial support to
the entity with no future related costs shall be recognized as income of the period in
which it becomes receivable.

Presentation of Grants Related to Assets

a. Government grants related to assets, including non-monetary grants at fair value,
shall be presented in the statement of financial position either by setting up the grant
as deferred income or by deducting the grant in arriving at the carrying amount of
the asset.
b. Two methods of presentation in financial statements of grants (or the appropriate
portions of grants) related to assets are regarded as acceptable alternatives.
1. Sets up the grant as deferred income which is recognized as income on a
systematic and rational basis over the useful life of the asset.
2. Deducts the grant in arriving at the carrying amount of the asset - The grant
is recognized as income over the life of a depreciable asset by way of a reduced
depreciation charge.
c. The purchase of assets and the receipt of related grants can cause major
movements in the cash flow of an entity. For this reason and in order to show the
gross investment in assets, such movements are often disclosed as separate items
in the cash flow statement regardless of whether or not the grant is deducted from
the related asset for the purpose of balance sheet presentation.

Presentation of Grants Related to Income

a. Grants related to income are sometimes presented as a credit in the income
statement, either separately or under a general heading such as “Other income”;
alternatively, they are deducted in reporting the related expense.
b. Supporters of the first method claim that it is inappropriate to net income and
expense items and that separation of the grant from the expense facilitates
comparison with other expenses not affected by a grant. For the second method it is
argued that the expenses might well not have been incurred by the entity if the grant
had not been available and presentation of the expense without offsetting the grant
may therefore be misleading.
c. Both methods are regarded as acceptable for the presentation of grants related to
income. Disclosure of the grant may be necessary for a proper understanding of the
financial statements. Disclosure of the effect of the grants on any item of income or
expense, which is required to be separately disclosed, is usually appropriate.

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Repayment of Government Grant
a. If a grant becomes repayable, it should be treated as a change in estimate.
b. If the grant is recorded as a deferred income, the repayment should be applied first
against any related unamortized deferred income (the balance of the deferred
income), and the difference shall be recognized as expense.
c. Where the original grant related to an asset, the repayment should be treated as
increasing the carrying amount of the asset or reducing the deferred income
balance.
d. The cumulative depreciation which would have been charged had the grant not been
received should be charged as depreciation expense.

PROBLEM SOLVING
1. On January 1, 2019 Union Company received a grant of P10,000,000 from the
British government in order to defray safety and environmental costs within the area
where the enterprise is located. The safety and environmental costs are expected to
be incurred over four years, respectively, P1,000,000, P2,000,000, P2,000,000 and
P3,000,000. How much income from the government grant should be recognized in
2019?
A. 1,000,000
B. 1,250,000
C. 2,000,000
D. 10,000,000

Use the following to answer the next two questions

On January 1, 2019, Carroll Company received a grant of P1,000,000 from the
Philippine Government for the construction of a laboratory and research facility with a
total cost of P6 million and a useful life 5 years and a residual value of P500,000. The
facility was completed in early of 2019. Carroll Company recorded the grant as deferred
revenue upon the receipt.

2. What should Carroll Company include in its 2019 income statement an income from
the government grant?
A. 500,000
B. 240,000
C. 200,000
D. 100,000

3. If the grant becomes repayable in full in 2021 because Carroll is not able to comply
with the conditions required for the grant, what is the amount of loss to be
recognized in the income statement?
A. 1,000,000
B. 600,000
C. 500,000
D. 400,000

4. On January 1, 2019, Beetle Company received a grant of P8,000,000 from the

Australian government to compensate for massive losses incurred because of a
recent tsunami. The grant requires no fulfillment of certain conditions. The grant
was for the purpose of giving immediate financial support to the entity. It will take
Beetle 2 years to reconstruct its facilities destroyed by the tsunami. How much
income from the government grant should be recognized by Beetle in 2019?
A. 8,000,000
B. 4,000,000
C. 2,500,000
D. 2,000,000

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Use the following to answer the next three questions

On January 1, 2019, Lenny Company received a grant of P800,000 from a Foreign
Government for the acquisition of an equipment to be used for research activities with
regard to environmental concerns. The equipment was placed into activity early in
2019. Lenny Company recorded the grant as a deduction toward the capital cost of the
equipment. The equipment cost Lenny at a gross amount of P4,000,000 with a residual
value of P200,000 at the end of its 5-year useful life.

Lenny however was not able to comply with the strict requirements of the foreign
government and was required to pay the total amount of the grant in full in 2021.

5. How much is the depreciation expense in 2019?

A. 760,000
B. 640,000
C. 600,000
D. 500,000

6. How much is the depreciation expense in 2021?

A. 600,000
B. 920,000
C. 1,080,000
D. 1,200,000

7. How much is the depreciation expense in 2022?

A. 600,000
B. 760,000
C. 800,000
D. 960,000

THEORETICAL CONCEPTS
1. Which is not an essential characteristic of property, plant and equipment?
A. The property plant and equipment are tangible assets.
B. The property, plant and equipment are used in production or supply of goods and
services, for rental, administrative purposes.
C. The property, plant and equipment is expected to be used over a period of more
than one year.
D. The property, plant and equipment are subject to depreciation.

2. The cost of an item of property, plant and equipment includes all of the following,
except
A. Trade discount and rebates
B. Purchase price
C. Import duties and nonrefundable purchase taxes
D. Directly attributable costs of bringing the asset to working condition for its
intended use.

3. Examples of costs that are expensed rather than recognized as an element of cost
of property, plant and equipment include all of the following, except
A. Cost of employee benefits arising directly from the construction or acquisition of
an item of property, plant and equipment.
B. Cost of opening a new facility
C. Cost of introducing a new product or service, including cost of advertising and
promotion.
D. Cost of relocating or reorganizing part or all of an entity’s operations.

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4. The carrying amount of property, plant and equipment subsequent to acquisition is
the
A. Historical cost less accumulated depreciation
B. Revalued amount less accumulated depreciation and accumulated impairment
losses thereon
C. Fair value less accumulated impairment losses thereon
D. Amount at which an asset is recognized in the statement of financial position less
accumulated depreciation and accumulated impairment losses thereon

5. Entity-specific value is the

A. Amount at which an asset is recognized after deducting any accumulated
depreciation and accumulated impairment losses.
B. Cost of an asset or other amount substituted for cost, less its residual value.
C. Amount for which an asset could be exchanged between knowledgeable and
willing parties in an arm’s length transaction.
D. Present value of the cash flows that an entity expects to arise from the continuing
use of an asset and from its disposal at the end of its useful life or expects to
incur when settling a liability.

6. The cost of the plant asset “building” should usually include all, except
A. Cost of renovation or remodeling required to prepare the building for its intended
use
B. Expenditures for service equipment and fixtures made as permanent part of the
building
C. Property taxes related to the period prior to acquisition that are assumed by the
buyer
D. Costs incurred to have existing building removed to make room for the
construction of new building

7. The cost of the land to be used in the operations of a business should include all of
the following, except
A. Commission related to the land acquisition
B. Property taxes at the date of acquisition assumed by the purchaser
C. Excavation in preparation for the construction of a new building on the land.
D. The cost of a survey.

8. Improvements which result to increased future economic benefits include all, except
A. Modification of an item of property to extend its useful life or increase its capacity.
B. Upgrade of machine parts to improve quality of output
C. Adoption of a new production process leading to large reduction in operating cost
D. Expenditure on repair or maintenance of property, plant and equipment, such as
cost of servicing or overhauling plant and equipment.

9. Technical obsolescence arises from

A. Expected usage of the asset
B. Expected physical wear and tear
C. Expiry date of related lease of the asset
D. Change or improvements in production or change in the market demand for the
product output of the asset.

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10. Which is incorrect concerning the residual value of an item of property, plant and
equipment?
A. The depreciable amount of an asset is determined after deducting the
accumulated depreciation of the asset.
B. In practice, the residual value of an asset is often insignificant and therefore is
immaterial in the calculation of the depreciable amount.
C. The residual value of an asset may increase to an amount equal or greater than
the asset’s carrying amount.
D. The residual value of an asset shall be reviewed at least at each financial year-
end and if expectation differs from previous estimate, the change shall be
accounted for as a change in accounting estimate.

11. The composite depreciation method

A. Is applied to a group of homogeneous assets.
B. Is an accelerated method of depreciation.
C. Does not recognize gain or loss on the retirement of specific assets in the group.
D. Excludes salvage value from the base of the depreciation calculation.

12. Which of the following depreciation methods applies a uniform depreciation rate
each period to an asset's book value?
A. Straight-line
B. Units-of-production
C. Declining-balance
D. Sum-of-the-years'-digits

13. An entity bought a private jet. The jet is expected to be used over a period of 7
years, its engine has a useful life of 5 years and its tires are replaced every 2 years.
The jet shall be depreciated using straight-line method over
A. 7 years composite useful life
B. 5 years for the engine, 2 years for the tires and 7 years for the balance of the
cost of the private jet
C. 2 years based on conservatism as this is the lowest useful life of all parts of the
jet.
D. 5 years based on a simple average of the useful lives of the major components of
the jet.

14. In recording the trade of one asset for another, which of the following accounts is
usually debited?
A. Accumulated Depreciation-Old Asset
B. Cash
C. Gain on Exchange of Asset
D. None of the above

15. Gain or loss from disposal of an item of property, plant and equipment is equal to the
difference between
A. Fair value of the asset on balance sheet date and its carrying amount
B. Net realizable value on balance sheet date and its carrying amount
C. Net proceeds from disposal and the cost of the asset
D. Net proceeds from disposal and the carrying amount of the asset

16. What is the acceptable approach in accounting for government grants?

A. Government grants should be recognized as income over the periods necessary
to match them with the related costs.
B. Government grants should be credited directly to donated capital.
C. Government grants should be credited directly to retained earnings.
D. Government grants should be deferred and amortized over a maximum period of
20 years.

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17. Government grant shall be recognized when there is reasonable assurance that
A. The entity will comply with the conditions of the grant
B. The grant will be received.
C. The entity will comply with the conditions of the grant and the grant will be
received.
D. The grant must have been received.

18. In the case of grant related to an asset, which accounting treatment is prescribed?
A. Record the grant at a nominal value in the first year and write it off in the
subsequent year.
B. Either as deferred income or deduction from the carrying amount of the asset.
C. Record the grant at fair value in the first year ad take it to income in the
subsequent year.
D. Take it to income immediately.

19. Grant in recognition of specific costs is recognized as income

A. Over the same period as the relevant expense on a systematic and rational
basis.
B. Immediately
C. Over 5 years using straight line
D. Over 5 years using sum of digits

20. Grant related to depreciable asset is usually recognized as income

A. Immediately
B. Over the useful life of the asset using straight line
C. Over the useful life of the asset using sum of year’s digits
D. Over the useful life of the asset and in proportion to the depreciation of the asset.

21. A grant that becomes receivable as compensation for losses already incurred or for
the purpose of giving immediate financial support should be recognized as income
A. When received
B. Of the period in which it becomes receivable
C. Over 5 years using straight line
D. Over 10 years using straight line

22. In the case of grant related to income, which accounting treatment is prescribed?
A. Credit the grant to “general reserve” under shareholders’ equity.
B. Present the grant as other income, separate line item or deduction from the
related expense.
C. Credit the grant to retained earnings.
D. Credit the grant to sales.

23. A government grant that becomes repayable shall be accounted for as a

A. Change in accounting estimate
B. Change in accounting policy
C. Both change in accounting estimate and change in accounting policy
D. Neither change in accounting estimate nor change in accounting policy

24. Repayment of a grant related to income shall be

A. Recognized in profit or loss immediately
B. Recognized in other comprehensive income
C. Recognized in retained earnings
D. Applied first against any unamortized deferred income set up previously, and any
excess is recognized immediately in profit or loss.

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25. Repayment of grant related to an asset shall be recorded by
A. Increasing the carrying of the asset if the deduction approach is used.
B. Recognizing as expense the cumulative additional depreciation that would have
been recorded to date in the absence of the grant if the deduction approach is
used.
C. Reducing the deferred income balance if the deferred income approach is used.
D. All of these

26. When funds are borrowed specifically for the purpose of obtaining a qualifying asset,
the capitalizable borrowing cost is equal to
A. Actual borrowing cost incurred during the period
B. Actual borrowing cost incurred during the period plus any investment income on
the temporary investments of the borrowings
C. Actual borrowing cost incurred during the period minus any investment income
on the temporary investments of the borrowings
D. Estimate borrowing cost during the period

27. If the qualifying asset is financed by general borrowings, the capitalizable borrowing
cost is equal to
A. Actual borrowing cost incurred.
B. Total expenditures on the asset multiplied by a capitalization rate.
C. Average expenditures on the asset multiplied by a capitalization rate or actual
borrowing cost incurred, whichever is lower.
D. Average expenditures on the asset multiplied by a capitalization rate or actual
borrowing cost incurred, whichever is higher.

28. The capitalization of borrowing costs as part of the cost of a qualifying asset should
commence when (choose the incorrect one)
A. Expenditures for the asset are being incurred.
B. Borrowing cost are being incurred.
C. Activities that are necessary to prepare the asset for its intended use or sale are
in progress.
D. Substantially all the activities necessary to prepare the qualifying asset for its
intended use or sale are complete.

29. Capitalization of borrowing costs

A. Shall be suspended during temporary period of delay.
B. May be suspended only during extended period of delay in which active
development is delayed.
C. Should never be suspended once capitalization commences.
D. Shall be suspended only during extended period of delay in which active
development is delayed.

30. Which of the following is not a disclosure requirement under PAS 23?
A. Accounting policy adopted for borrowing costs.
B. Amount of borrowing costs capitalized during the period.
C. Segregation of assets that are “qualifying assets” from other assets on the
balance sheet or as a disclosure in the footnotes to the financial statements.
D. Capitalization rate used to determine the amount of borrowing costs eligible for
capitalization.

END OF HANDOUT

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