AUDIT OF

PROPERTY, PLANT AND EQUIPMENT

It must be:
1. Tangible Assets
2. Used in production, General and Administrative
Purpose and Rentals
3. Expected to be use in more than 1 period
• INITIAL MEASUREMENT AT Cost. Cost of PPE shall include:

• A. Cost of acquisition*

• B. Incidental cost in bringing the asset to its present location

and condition necessary for use. (e.g. Freight, Delivery, Handling,
Testing)

• C. Present value of the initial estimate of dismantling, removal

or site restoration cost (to the extent that the company has
incurred an obligation over these future costs).
• *Cost of acquisition depends on the mode of acquisition

• a. Cash purchase = Cash price + import duties +

nonrefundable taxes (net of discount and rebates)

• b. On account = at cash price equivalent (net of discounts

whether taken or not taken)

• c. Installment/Deferred payment basis – at cash price

equivalent or at present value of deferred payment

• d. Share/Bond issue – at fair value of asset or shares

whichever is more clearly determinable
• e. Exchange with commercial substance – at fair value of asset
received (which is equal to the fair value of asset given-up +
cash paid or – cash received)

• f. Exchange without commercial substance – at book value of

asset given-up + cash paid or – cash received

• g. Donation where the donor is a related party – at fair value

(credit to Share Premium/Donated Capital)

• h. Donation where the donor is a non related party (e.g.

Government Grant) – at fair value (credit to Income, if
unconditional grant or Deferred Income, if conditional grant)
• SUBSEQUENT MEASUREMENT

• a. Cost Method : At Cost, net of accumulated depreciation,

and impairment loss

b. Appraisal/Revaluation method: At fair market value

• IMPAIRMENT LOSS
• An asset is impaired if only if the Carrying Value is > Net recoverable value

• *Net recoverable value is the higher between the Fair Value less Cost to
Sell or the Value in Use

• *Fair Value less Cost to Sell = Estimated Selling Price – Estimated Cost to
Sell

• *Value in Use = PV of the future net cash flow from the continued use of
the asset and from its ultimate disposal using a pre-tax discount rate

Salvage Value
• REVALUATION/APPRAISAL

• A. If asset have an active market, thus FMV is ready determinable:

Fair value of Asset
Less: Carrying Value
Revaluation Surplus

• B. If asset have no active market, thus the appraisal is determined

through the current replacement cost:
Replacement Cost XX XX Original Cost
Replacement AD (XX) (XX) Accum. Depreciation on Cost
Fair Value/Sound Value XX XX Carrying Value

• Fair Value/Sound Value = Replacement Cost *Condition Percent

• Condition Percent = (remaining life/total life, original estimate) or
• (carrying value/depreciable cost, original estimate)
• Transfer of Revaluation Surplus: (credit to retained earnings)
a. Piecemeal: RS/Remaining life of depreciable asset
b. Lump sum: Realize upon disposal or retirement

• Steps in Impairment with Subsequent Revaluation:

• a. Recognized impairment loss on the year of incurrence.

• b. Continue Depreciation based on the impaired value.

• c. Upon revaluation, recognize the gain on recovery =

(CV had there been no impairment – CV based on impaired value)

• d. Recognize as revaluation surplus (under revaluation method) =

(Fair Value – CV had there been no impairment)
• Steps in Revaluation with Subsequent Impairment:

• a. Recognize the revaluation surplus in the stockholders’ equity

• b. Continue Depreciation based on the revalued amount (realized

revaluation surplus on a piecemeal basis if applicable)

• c. Upon Impairment, write off the remaining revaluation surplus =

(CV based on revalued amount – CV had there been no revaluation)

• d. Recognize as impairment loss in the income statement =

(CV had there been no revaluation – Impaired value/ Fair Value)
• Depreciation Methods

• 1. Uniform Fixed Charge Method

• Straight Line = Depreciable Cost / Useful life

• 2. Variable Charge Methods

• Working Hours = Depreciable Cost / life in terms of working hours * actual
hours used
• Output Method = Depreciable Cost / life in terms of actual output * actual
output
• 3. Diminishing Balance Methods
• SYD = Depreciable Cost * SYD rate
• Declining Balance = Cost * Dbrate (consider salvage value only on the last
year of depreciation)
• 4. Others (useful for depreciating small tools and similar items)
• Inventory Method = Beg. Tools + Purchases – End Tools – Proceeds from
disposal of tools

• Replacement Method = Tools disposed * Cost of latest purchases – Proceeds

from disposal

• Retirement Method = Tools disposed * Cost of earlier purchases – Proceeds

from disposal
• For the computation of depreciation, where there are several
transactions happening during the period.

– List down all the items which became outstanding at one time or
another during the period:

– 1. Disposed (Depreciate from January up to Date of Disposal)

– 2. Newly Acquired (Depreciate from Date of Acquisition to Dec. 31)

– 3. Outstanding during the entire year

 • PIC (Philippine Interpretations Committee) INTERPRETATION on
Land, Building and Demolition Cost

• 1. Land and Building acquired in a single price

A. Old Building is usable – Allocate the Purchase Price (if there is Fair
Value assumed usable)
B. Unusable – Land only

2. Cost of usable Old Building and Demolition cost

PPE Investment Inventory
Property
Building EXPENSE EXPENSE CAPITALIZED
Demolition CAPITALIZED
Cost
• Exercise 1.
• You were assigned to audit Rolling Corp.’s property, plant and equipment for the year
ended December 31, 2015.
• The following information were made available. Balances as of January 1, 2015:
• Cost Accum. Depreciation
• Land P5,000,000
• Building 10,000,000 P3,150,000
• Factory Equipment 8,000,000 3,904,000
• Automotive Equipment 5,000,000 2,700,000
• All of the company’s properties were acquired upon the commencement of the
operations three years ago (from January 1, 2015) and remained the same until the
current year. The depreciation were computed based on the following methods and
useful lives. Salvage value is assumed to be at 10% of the asset’s cost.
• Depreciation Method Useful life
• Building SYD 15 years
• Factory Equipment Double-declining 10 years
• Automotive Equipment Straight-line 5 years
• The following transactions occurred during the year:

• a. A new factory equipment was acquired on June 1, replacing an old factory equipment
originally acquired at P1,500,000, and was disposed on the same date at P250,000. The
new equipment was acquired at P2,000,000 payable 50% down payment, with the
balance payable in four equal installments every June 1 starting the next year. Freight
and unloading cost amounted to P50,000. Installation cost amounted to P70,000 . The
company estimates that it will incur significant dismantling cost upon the retirement of
the same factory equipment. Future estimated dismantling cost is at P227,041. The
market rate of interest that reflects all transaction on this date was at 10%.

• What is the initial cost of the new factory equipment acquired on June 1?
• Down payment 1,000,000
• Freight and Installation Cost 120,000
• Installment Payment 792,466 (250,000 * 3.1699 PV of an ordinary annuity of
1 at 10% for four periods)
• Dismantling Cost 87,534 ( 227,041 * 0.385 PV of 1 at 10% for 10 years)
• P 2,000,000
• What is the gain/loss on disposal of the factory equipment on June 1?
• Proceeds 250,000
• Carrying Value as of Jan 1, 2015 (1,500,000 *80%*80%*80%) 768,000
• Less: Depn. For 5 months (768,000 *20% *5/12) 64,000 (704,000)
• *DDB rate (10% * 2 = 20%) 454,000

• b. On August 1 a new automotive equipment was traded in for an old one which was originally
acquired at P1,000,000. The company paid P500,000 in the trade-in. The new automotive
equipment had a cash price of P1,200,000.

• c. Significant Improvements on the ventilating system and electrical wiring system of the
building were made at the beginning of the current year. Total cost incurred were P400,000 for
the ventilating system and P380,000 for electrical wiring system. The improvements have no
salvage value.

• What is the depreciation expense on the Building for 2015?

• Building 900,000 ( 10,000,000 – 1,000,000 ) * 12/120
• Building Improvements 120,000 (780,000 * 12/78)
• 1,020,000
• Salvage value = 10% of the asset’s cost
• What is the depreciation expense on the Automotive Equipment for 2015?
• Disposed: (1,000,000 – 100,000*) /5 * 7/12 105,000
• New: (1,200,000 – 120,000*) /5 * 5/12 90,000
• Balance (4,000,000 – 400,000*)/5 720,000
• *Salvage value = 10% of the asset’s cost 915,000

• What is the depreciation expense on the Factory Equipment for 2015?

• Disposed: (1,500,000 *80%*80%*80%*20%*) * 5/12 64,000
• New: (2,000,000 *20%*7/12) 233,333
• Balance: (6,500,000 * 80%*80%*80%*20%) 665,600
• 962,933
• Exercise 2.

• On January 1, 2009, MONICA CORP. acquired a factory equipment at a cost of P450,000.

The equipment is being depreciated using the straight-line method over its projected
useful life of 10 years with P50,000 salvage value.

• On December 31, 2010 , a determination was made that the net cash flows expected
from the continued use of the asset shall be P40,000 per year. Estimated salvage value
remains to be P50,000. The asset also had a fair value less cost to sell at P220,000 on
the same date. You ascertained that this was properly computed and that recognition of
the impairment was warranted. (the prevailing interest rate is 10%)
• What is the recoverable value of the asset on December 31, 2010?

• Value in use : net cash flows expected from the continued use of the asset:
(P40,000 * 5.3449 PV of an ordinary annuity of 1 at 10% for 8 years) 213,397
• Salvage Value (50,000 * 0.46651 PV of 1 at 10% for 8 years) 23,325
• Value in Use = 236,722
• Vs
• Fair Value less cost to sell = 220,000

• How much impairment loss should be recognized on December 31, 2010?

• Carrying Value (12/31/10) = (450,000-50,000)*8/10 + 50,000 P370,000
• Recoverable Value (236,722)
• Impairment Loss P133,278