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FAR OCAMPO/OCAMPO
FAR.3405-Property, Plant and Equipment –
Acquisition and Subsequent Expenditures MAY 2023

DISCUSSION PROBLEMS
1. Which statement is incorrect regarding property, plant 6. The cost of an item of property, plant and equipment
and equipment (PPE)? comprises:
a. PPE are tangible items that are held for use in the I. Its purchase price, including import duties and
production or supply of goods or services, for non-refundable purchase taxes, after deducting
rental to others, or for administrative purposes; trade discounts and rebates.
and are expected to be used during more than one II. Any costs directly attributable to bringing the asset
period. to the location and condition necessary for it to be
b. The cost of an item of PPE shall be recognized as capable of operating in the manner intended by
an asset if, and only if, it is probable that future management.
economic benefits associated with the item will III. The initial estimate of the costs of dismantling and
flow to the entity and the cost of the item can be removing the item and restoring the site on which
measured reliably. it is located, the obligation for which an entity
c. An item of PPE should be measured on initial incurs either when the item is acquired or as a
recognition at its cost. consequence of having used the item during a
d. PPE are presented in the statement of financial particular period for purposes other than to
position either as current or noncurrent. produce inventories during that period.
a. I, II, and III c. I and III only
2. The following buildings are property, plant and
b. I and II only d. I only
equipment, except
a. Factory building
7. Which of the following are included in the cost of an
b. Store building
item of PPE?
c. Head office building
a. Costs that are not directly attributable to bring the
d. Apartment building
asset to the location and condition for its intended
use.
3. Which of the following will be most likely included in
b. Costs incurred in using or redeploying the asset.
the line item property, plant and equipment in an
c. Costs incurred from incidental operations before or
entity’s statement of financial position?
during the construction or development activities.
a. Bearer animals
d. None of these.
b. Land held for sale in the ordinary course of
business
8. Costs directly attributable to bringing the asset to the
c. Equipment held for sale in accordance with PFRS 5
location and condition necessary for it to be capable of
d. Equipment for rental to others
operating in the manner intended by management
exclude
4. Which of the following will be least likely included in
a. Costs of employee benefits arising directly from
the line item property, plant and equipment in an
the construction or acquisition of the item of
entity’s statement of financial position?
property, plant and equipment.
a. Spare parts, stand-by equipment and servicing
b. Costs of site preparation.
equipment
c. Initial delivery and handling costs
b. Equipment acquired for safety or environmental
d. Administration and other general overhead costs.
reasons
c. Molds, tools and dies
9. Costs directly attributable to bringing the asset to the
d. Production supplies
location and condition necessary for it to be capable of
operating in the manner intended by management
5. The following information pertains to Queen
exclude
Corporation’s property, plant and equipment:
a. Installation and assembly costs.
Carrying amount, beginning P5,000,000 b. Costs of testing whether the asset is functioning
Acquisitions 1,800,000 properly.
Capitalized subsequent expenditures 500,000 c. Professional fees.
Repairs and maintenance 160,000 d. Costs of opening a new facility.
Reclassifications to 380,000
Reclassifications from 410,000 10. The cost of an item of property, plant and equipment
Disposals/retirements 1,240,000 may include
Depreciation 630,000 a. Costs of introducing a new product or service.
Impairment 290,000 b. Costs of advertising and promotional activities.
The carrying amount of Queen’s property, plant and c. Costs of conducting business in a new location or
equipment at the end of the period is with a new class of customer.
a. P5,110,000 c. P5,170,000 d. Costs incurred relating to leases of assets that are
b. P5,140,000 d. P5,270,000 used to construct an item of property, plant and
equipment, such as depreciation of right-of-use
assets.

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11. Extra Corporation is installing a new machine at its value of an ordinary annuity of 1 at 12% is 1.69
production facility. It has incurred these costs: for two periods and 2.40 for three periods.
Purchase price (including input tax of What is the total cost of the machinery?
P300,000) P2,800,000 a. P4,820,000 c. P5,690,000
Initial delivery and handling costs 200,000 b. P5,400,000 d. P6,000,000
Costs of site preparation 600,000
Consultants used for advice on the
acquisition of the machine 700,000 Use the following information for the next two questions.
Installation and assembly costs 500,000
Costs of testing (including P30,000 for Company A had a machine with a carrying amount of
costs of producing samples) 130,000 P450,000. Company B had a delivery vehicle with a
Proceeds from sale of samples carrying amount of P300,000. Companies A and B
produced when testing whether the exchanged the machine and vehicle, and Company B paid
machine is functioning properly 20,000 an additional P90,000 cash as part of the exchange.
Costs of training employees on how to Assume that the fair value of the delivery vehicle is
use the machine 80,000 P420,000. The exchange has commercial substance.
Estimated dismantling costs to be
incurred after 7 years 300,000 15. How much gain or loss should Company A recognize?
Operating losses before commercial a. P30,000 loss c. P120,000 loss
production 400,000 b. P60,000 gain d. P120,000 gain

The cost of the machine is 16. How much gain or loss should Company B recognize?
a. P5,310,000 c. P4,910,000 a. P30,000 loss c. P120,000 loss
b. P4,990,000 d. P4,900,000 b. P60,000 gain d. P120,000 gain

12. An entity acquired an office equipment with an invoice

price of P800,000 with terms 2/10, n/30. If the LECTURE NOTES:
payment is made outside of the discount period, the
entity will Exchange – No Boot
a. Recognize office equipment at P800,000. With commercial substance
b. Recognize office equipment at P784,000. 1) FV of asset given up (AGU)
c. Recognize purchase discount of P16,000. 2) FV of asset received
d. Not recognize forfeited purchase discount of 3) Carrying amount of asset given up
P16,000.
Gain (loss) = FV of asset given – CA of asset given
13. Seller Co. sold a used asset to Buyer Co. for P800,000, No commercial substance
accepting a five-year 6% note for the entire amount. Carrying amount of asset given up
Buyer's incremental borrowing rate was 14%. The
No gain or loss on exchange
annual payment of principal and interest on the note
was to be P189,930. The asset could have been sold
Exchange – With Boot
at an established cash price of P651,460. The present
value of an ordinary annuity of P1 at 8% for five With commercial substance
periods is 3.99. The asset should be capitalized on
buyer's books at Payor = FV of AGU + cash paid = FV of AR
a. P949,650 c. P757,820 Recipient = FV of AGU - cash received = FV of AR
b. P800,000 d. P651,460 No commercial substance
Payor = CA of AGU + cash paid
LECTURE NOTES: Recipient = CA of AGU – cash received

Installment/Deferred payment
Interest bearing: Use the following information for the next two questions.
Realistic/Market rate = Face value Payor Inc. and Recipient Co. have an exchange with no
Unrealistic/Not at market rate: commercial substance. The asset given up by Payor Inc.
1) Cash price has a book value of P12,000 and a fair value of P15,000.
2) Present value of payments The asset given up by Recipient Co. has a book value of
P20,000 and a fair value of P19,000. The indicated loss on
Non-Interest bearing:
the part of Recipient Co. is an indication that its asset
1) Cash price
given up is impaired. Boot of P4,000 is received by
2) Present value of payments
Recipient Co.
17. Payor Inc. should record the asset received at
14. Imus Corp. acquired two items of machinery during the a. P15,000 c. P19,000
current year as follows: b. P16,000 d. P20,000
• On Jan. 1, a used machinery by issuing to the
seller a three-year, 12% interest note for 18. Recipient Co. should record the asset received at
P3,000,000. a. P15,000 c. P19,000
• On Dec. 30, a machine in exchange for a b. P16,000 d. P20,000
noninterest bearing note requiring three payments
of P1,000,000. The first payment was made on
that date and the others are due annually on Dec.
30. The prevailing rate of interest for this type of
note at date of issuance was 12%. The present

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Use the following information for the next two questions. 23. Bearer plants are accounted for in the same way as
a. Self-constructed items of PPE
A used delivery truck was traded in for a new truck.
b. Acquired items of PPE
Information relating to the trucks follows:
c. Donated items of PPE
Used truck: d. Any of these
Cost P1,600,000
Accumulated depreciation 1,200,000 24. An entity received an equipment with a fair value of
New truck: P500,000 as donation. Which statement is incorrect?
List price 1,950,000 a. The entity will recognize the equipment at
Cash price without trade-in 1,900,000 P500,000.
Cash price with trade-in 1,560,000 b. The entity will recognize an increase in equity if
the donor is a shareholder.
19. If the fair value of the used truck is P320,000, the cost c. The entity will recognize income from donation if
of the new truck is the donor is not a shareholder.
a. P1,960,000 c. P1,880,000 d. The entity will recognize the equipment at nominal
b. P1,900,000 d. P1,560,000 amount.

25. Subsequent expenditures on property, plant and

20. If the fair value of the old truck is not determinable, equipment are normally capitalized when they result in
the loss on trade-in is a. Extension of useful life
a. P350,000 c. P10,000 b. Increase in productive capacity
b. P 60,000 d. Nil c. Improvement in efficiency
d. Any of these
21. Which statement is incorrect regarding the cost of a
self-constructed asset? 26. Which of the following are not recognized in the
a. If an entity makes similar assets for sale in the carrying amount of an item of PPE?
normal course of business, the cost of the asset is a. Costs of regular major inspection, which is a
usually the same as the cost of constructing an condition to continue to operate an item of PPE.
asset for sale. b. Costs of replacing parts of an item of PPE at
b. Any internal profits are eliminated in arriving at regular intervals.
such costs. c. Costs of replacing parts of an item of PPE at
c. The cost of abnormal amounts of wasted material, irregular intervals.
labor, or other resources incurred in self- d. Costs of the day-to-day servicing of the item.
constructing an asset is included in the cost of the
asset.
27. Dasmariñ Corp. has a production assembly line to
d. None, all the statements are correct.
manufacture furniture. The entity purchased a new
machine and rearranged the assembly line to install
22. At the end of the reporting period, SKL Corp. shows
this machine. The rearrangement did not increase the
the following account for machinery it had assembled
estimated useful life of the assembly line but it did
for its own use during the period:
result in significantly more efficient production. The
Account: MACHINERY (Job Order #7339344) following expenditures were incurred in connection
Item Debit Credit with this project:
Cost of dismantling old Purchase price of machine P5,000,000
machine P14,480 Labor to install new machine 400,000
Cash proceeds from sale of Parts added in rearranging the
old machine P12,000 assembly line to provide future
Raw materials used in benefits 2,000,000
construction of new Labor and overhead to rearrange the
machine 76,000 assembly line 600,000
Labor on construction of new
machine 49,000 What amount of the above expenditures should be
capitalized?
Cost of installation 11,200
a. P8,000,000 c. P5,400,000
Materials spoiled in machine
b. P7,400,000 d. P2,600,000
trial runs 2,400
Profit on construction 24,000
Purchase of machine tools 13,000 28. Which statement is incorrect regarding land and
buildings?
An analysis of the details in the account disclosed the
a. Land and buildings are separable assets and are
following:
normally accounted for separately, even when they
a. Cash discounts received on the payments for
are acquired together.
materials used in construction totaled P3,000, and
b. Land normally has an unlimited useful life and
these were reported in the purchase discounts
therefore is not depreciated.
account.
c. Buildings have a limited useful life and therefore
b. The factory overhead account shows a balance of
are depreciable assets.
P292,000 for the current period; this balance
d. An increase in the value of the land on which a
exceeds normal overhead on regular plant
building stands affects the determination of the
activities by approximately P16,900 and is
depreciable amount of the building.
attributable to machine construction.
The adjusted cost of the machinery is
a. P165,500 c. P133,200
b. P152,500 d. P150,100

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29. Separate accounting for land and building is required if 35. Reiley Co. purchased land as a factory site for
the building is classified as P1,000,000. Reiley paid P40,000 to tear down two
a. Property, plant and equipment buildings on the land. Salvage was sold for P5,400.
b. Inventory Legal fees of P3,480 were paid for title investigation
c. Investment property measured at fair value and making the purchase. Income of P8,000 was
d. Any of these earned through using the land as a car park before
construction started. Architect's fees were P41,200.
30. An entity acquired a piece of land with existing Title insurance cost P2,400, and liability insurance
building. It may be appropriate to allocate the entire during construction cost P2,600. Excavation cost
purchase price to the land P10,440. The contractor was paid P2,400,000. An
a. In circumstances where the existing building is assessment made by the city for pavement was
unusable or is likely to be demolished right away. P6,400.
b. If the existing building is still usable and the
The cost of the land is
acquiring entity intends to use it for a while before
a. P1,040,480 c. P1,046,880
it is demolished in a future period.
b. P1,032,480 d. P1,038,880
c. In either a or b.
d. In neither a nor b.
Use the following information for the next two questions.
31. An entity acquired a piece of land with existing building
with the intention to demolish the old building right Hawks Corporation’s Property, Plant and Equipment as of
away in order to construct a new building on its site as Jan. 1 of the current year included the following:
part of its planned redevelopment. In accordance with
Land P 400,000
PIC Q&A No. 2012-02, it is appropriate for the entity to
Buildings 3,200,000
account for the carrying value of the old building as
part of the cost of the new building
The following transactions occurred during the year:
a. That will be used as an owner-occupied property
b. That will be held as an investment property • Land site number 102 was acquired for P4,000,000.
c. That will be sold as an inventory Additionally, to acquire the land the entity paid a
d. None of the above. P240,000 commission to a real estate agent. Costs of
P60,000 were incurred to clear the land. During the
32. An entity acquired a piece of land with existing building course of clearing the land, timber and gravel were
with the intention to initially use the old building as an recovered and sold for P20,000.
owner-occupied property and then demolish it in a • A second tract of land (site number 103) with a
future period and replace it with a new building. In building was acquired for P1,200,000. Based on
accordance with PIC Q&A No. 2012-02, it is reliable information at the time of acquisition, fair
appropriate for the entity to account for the carrying value of land is P800,000 and the building P400,000.
value of the old building as part of the cost of the new Shortly after acquisition, the building was demolished
building at a cost of P120,000. A new building was constructed
a. That will be used as an owner-occupied property for P1,600,000 plus the following costs:
b. That will be held as an investment property
Excavation fees P 44,000
c. That will be sold as an inventory
Architectural design fees 32,000
d. None of the above.
Building permit fee 4,000
33. In accordance with PIC Q&A No. 2012-02, the costs The building was completed and occupied on Sept. 1.
incurred in relation to demolition (or the physical
tearing down) of the old building to give way for the QUESTIONS:
construction of the replacement building should Determine the balance of the following as of Dec. 31 of the
preferably be current year in accordance with PIC Q&A 2012-02:
a. Expensed.
b. Capitalized as part of the cost of land. 36. Land
c. Capitalized as land improvements. a. P5,600,000 c. P6,000,000
d. Capitalized as part of the cost of the new building. b. P5,480,000 d. P7,880,000
37. Buildings
34. Lenny Corporation purchased for P690,000 a tract of
a. P5,400,000 c. P5,000,000
land on which a warehouse and office building were
b. P5,280,000 d. P4,880,000
located. The following data were collected concerning
the property:
38. The financial statements shall disclose, for each class
Current Assessed Vendor's
of property, plant and equipment
Valuation Original Cost
I. The measurement bases used for determining the
Land P280,000 P180,000
gross carrying amount
Warehouse 320,000 315,000
II. The depreciation methods used
Office Building 200,000 129,000
III. The useful lives or the depreciation rates used
P800,000 P624,000
IV. The gross carrying amount and the accumulated
Determine the appropriate amount that Lenny should depreciation (aggregated with accumulated
charge to land. impairment losses) at the beginning and end of the
a. P690,000 c. P241,500 period
b. P280,000 d. P199,000 V. A reconciliation of the carrying amount at the
beginning and end of the period
a. I, II, III, IV and V c. I, II and III only
b. I, II, III and IV only d. II, III, IV and V only

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39. Which of the following additions should be disclosed 40. The financial statements shall disclose, for each class
separately? of property, plant and equipment
a. Acquisitions where payment is deferred beyond I. The carrying amount of temporarily idle property,
normal credit terms plant and equipment.
b. Acquisitions by way of government grant II. The gross carrying amount of any fully depreciated
c. Acquisitions through business combinations property, plant and equipment that is still in use.
d. All of these III.The carrying amount of property, plant and
equipment retired from active use and not
classified as held for sale in accordance with PFRS
5.
IV. When the cost model is used, the fair value of
property, plant and equipment when this is
materially different from the carrying amount.
a. I, II, III and IV c. I and III only
b. I, II and III only d. None of these

- done -

ILLUSTRATIVE PROBLEMS
PROBLEM NO. 1 – Items considered as PPE

_____ 1. Land held for capital appreciation

_____ 2. Land and building for rental to others under operating leases
_____ 3. Land and building for rental to others under finance leases
_____ 4. Land and other property of a real estate entity held for resale
_____ 5. Factory building
_____ 6. Research and development building
_____ 7. Head office building
_____ 8. Store building
_____ 9. Machinery used in production
_____ 10. Delivery vehicle
_____ 11. Office furniture and fixtures
_____ 12. Equipment for rental to others under operating leases
_____ 13. Equipment for rental to others under finance leases
_____ 14. Equipment held for sale in the ordinary course of business
_____ 15. Equipment held for sale in accordance with PFRS 5
_____ 16. Dogs used in rendering security services
_____ 17. Dogs that a pet shop buys from breeders that it then sells
_____ 18. Dogs for breeding puppies
_____ 19. Fish in farms
_____ 20. Fish caught in the sea
_____ 21. Elephants in an animal theme park
_____ 22. Elephants used as taxis
_____ 23. Plants displayed in an entity’s administrative office
_____ 24. Grape vines
_____ 25. Tomato vines

REQUIRED:

YES OR NO. Write YES if the item is PPE. If not, write NO.

ANSWERS:

1. NO (Investment properties) 11. YES 21. YES

2. NO (Investment properties) 12. YES 22. YES
3. NO (Derecognize) 13. NO (Derecognize) 23. YES
4. NO (Inventories) 14. NO (Inventories) 24. YES
5. YES 15. NO (Non-current asset HFS) 25. NO (Biological assets)
6. YES 16. YES
7. YES 17. NO (Inventories)
8. YES 18. NO (Biological assets)
9. YES 19. NO (Biological assets)
10. YES 20. NO (Inventories)

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PROBLEM NO. 2 – Items included in cost of PPE

_____ 1. Purchase price

_____ 2. Input tax
_____ 3. Import duties
_____ 4. Cash discounts not taken
_____ 5. Costs of employee benefits arising directly from the construction or acquisition of the item of PPE
_____ 6. Costs of opening a new facility
_____ 7. Costs of site preparation
_____ 8. Costs of introducing a new product
_____ 9. Costs of advertising and promotional activities
_____ 10. Initial delivery and handling costs
_____ 11. Installation and assembly costs
_____ 12. Costs of conducting business in a new location
_____ 13. Costs of testing whether the asset is functioning properly
_____ 14. Professional fees paid related to acquisition of PPE
_____ 15. Administration and other general overhead costs
_____ 16. Initial operating losses
_____ 17. Costs of relocating or reorganizing part or all of an entity’s operations
_____ 18. Expenses related to incidental operations before construction of an item of PPE
_____ 19. Estimated costs of dismantling and removing the item and restoring the site on which it is located
_____ 20. Costs incurred relating to leases of assets that are used to construct an item of PPE

REQUIRED:

YES OR NO. Write YES if the item is included in the cost of PPE. If not, write NO.

ANSWERS:

1. YES
2. NO
3. YES
4. NO
5. YES
6. NO
7. YES
8. NO
9. NO
10. YES
11. YES
12. NO
13. YES
14. YES
15. NO
16. NO
17. NO
18. NO
19. YES
20. YES

J - end of FAR.3405 - J

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