Lecture Notes On Ppe - Acq & Rec.pdf

LECTURE NOTES ON PPE (Acquisition, Recognition, Measurement, Derecognition)

Nature of Property, Plant and Equipment 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. This recognition principle is applied to all property, plant, and equipment costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it. Initial Measurement Property, plant, and equipment should be initially recorded at cost. Cost is 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 PFRSs, eg PFRS 2 Share-based Payment. 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. (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. PPE acquisitions - Determination of purchase price Cash Amount paid On account subject to cash discount Net of cash discounts whether taken or not Installment/Deferred payment Interest bearing: Realistic/Market rate = Face value Unrealistic/Below market rate: 1) Cash price 2) PV of payments Non-Interest bearing: 1) Cash price 2) PV of payments Issuance of own securities Equity (e.g. Ordinary shares) – PFRS 2 1) FV of consideration received 2) FV of shares issued 3) Par value of shares issued Debt (e.g. 1) 2) 3)

Bonds payable) – PAS 39 FV of bonds payable (FL) FV of consideration received Face value of bonds payable

Exchange – No Boot With commercial substance 1) FV of asset given up (AGU) 2) FV of asset received 3) Carrying amount of asset given up Gain (loss) = FV of asset given – CA of asset given

No commercial substance Carrying amount of asset given up No gain or loss Exchange – With Boot With commercial substance Payor = FV of AGU + cash paid = FV of AR Recipient = FV of AGU - cash received = FV of AR No commercial substance Payor = CA of AGU + cash paid Recipient = CA of AGU – cash received Trade-in Same with exchange Donation Fair value of asset received Government grant Fair value of asset received Self-construction DM + DL + Overhead If appropriate, plus borrowing costs Examples of directly attributable costs: (a) costs of employee benefits (as defined in PAS 19 Employee Benefits) arising directly from the construction or acquisition of the item of property, plant and equipment; (b) costs of site preparation; (c) initial delivery and handling costs; (d) installation and assembly costs; (e) costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment); and (f) professional fees. Examples of costs that are not costs of an item of property, plant and equipment are: (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); and (d) administration and other general overhead costs. Land Acquired with Building Before PIC Q&A No. 2012-2 Old building demolished RIGHT AWAY: • Total cost charged to Land including demolition costs Old building USED INITIALLY before demolition: • Total cost allocated to land and building pro rata based on fair values • Demolition of old building accounted for as derecognition (ie the difference between the proceeds and carrying amount recognized as gain or loss) • Demolition costs are included in computing gain or loss on derecognition In accordance with PIC Q&A No. 2012-2 • Total cost allocated to land and building pro rata based on fair values REGARDLESS of intention • Allocated cost or CA of old building generally recognized in profit or loss as loss on derecognition • Exception, old building demolished right away and the new building is inventory Demolition costs are preferably included in the cost of the NEW building

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. The residual value of an asset is 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 is: (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. 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 depreciable amount should be allocated on a systematic basis over the asset's useful life. The residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations differ from previous estimates, any change is accounted for prospectively as a change in estimate under PAS 8. The depreciation method used should reflect the pattern in which the asset's economic benefits are consumed by the enterprise. The depreciation method should be reviewed at least annually and, if the pattern of consumption of benefits has changed, the depreciation method should be changed prospectively as a change in estimate under PAS 8. Depreciation should be charged to the income statement, unless it is included in the carrying amount of another asset. Depreciation begins when the asset is available for use and continues until the asset is derecognized, even if it is idle. SUMMARY OF DEPRECIATION METHODS Uniform/Equal Straight line Depreciable Amount (DA)/useful life Or DA x Depreciation rate (DR) DR = 1/useful life Group/Composite Cost or balance x DR DR = annual dep/total cost Activity Output/Production Output x Depreciation rate DR = DA/total est. output Working hours Hours used x Depreciation rate DR = DA/total est. hours Accelerated/Diminishing Sum of the years digits (SYD) DA x Fraction SYD = [(life+1)/2] x life Declining Previous CA x Depreciation rate Regular = 1 – [nth root of (RV/Cost)] 150% = (1/UL) x 1.5 200% = (1/UL) x 2 Other Methods Retirement Cost of assets retired – Proceeds from retirement Replacement

Replacement cost of assets retired – Proceeds from retirement Inventory Recorded balance of assets – Value at period end Derecognition (Retirements and Disposals) An asset should be removed from the balance sheet on disposal or when it is withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss on disposal is the difference between the proceeds and the carrying amount and should be recognized in the income statement PROBLEMS 1.

Extra Corporation is installing a new plant at its production facility. It has incurred these costs: Purchase price of plant Initial delivery and handling costs Cost of site preparation Consultants used for advice on the acquisition of the plant Estimated dismantling costs to be incurred after 7 years Operating losses before commercial production

P2,500,000 200,000 600,000 700,000 300,000 400,000

The total costs that can be capitalized in accordance with PAS 16 is 2.

Cabiao Company purchased a machine on December 2, 2015 at an invoice price of P4,500,000 with terms 2/10, n/30. On December 10, 2015, Cabiao paid the required amount for the machine. On December 2, 2015, Cabiao paid P80,000 for delivery of the machine and on December 31, 2015, it paid P310,000 for installation and testing of the machine. It was estimated that the machine would have a useful life of 5 years, and a residual value of P800,000. What amount should be capitalized as cost of the machine?

3.

Seller Co. sold a used an asset to Buyer Co. for P800,000, accepting a five-year 6% note for the entire amount. Buyer's incremental borrowing rate was 14%. The annual payment of principal and interest on the note was to be P189,930. The asset could have been sold at an established cash price of P651,460. The present value of an ordinary annuity of P1 at 8% for five periods is 3.99. The asset should be capitalized on buyer's books at

4.

Imus Company acquired two items of machinery as follows: • On January 1, 2015, Imus Company acquired used machinery by issuing to the seller a three-year, 12% interest note for P3,000,000. • On December 30, 2015, Imus Company purchased a machine in exchange for a noninterest bearing note requiring three payments of P1,000,000. The first payment was made on December 30, 2015, 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. What is the total cost of the machinery?

5.

Cavite Company acquired land and building by issuing 60,000, P100 par value, ordinary shares. On the date of acquisition, the shares had a fair value of P150 per share and the land and building had fair value of P2,000,000 and P6,000,000 respectively. During the year, Cavite also received land from a shareholder to facilitate the construction of a plant in the city. Cavite paid P100,000 for the land transfer. The land is fairly valued at P1,500,000. As a result of these acquisitions, Cavite Company’s equity had a net increase of

6.

Company A had a machine with a carrying amount of P450,000. Company B had a delivery vehicle with a carrying amount of P300,000. Companies A and B exchanged the machine and vehicle, and Company B paid an additional P90,000 cash as part of the exchange. Assume that the fair value of the delivery vehicle is P420,000. If the exchange has commercial substance, how much gain or loss should be recorded by Company A?

Use the following information for the next two questions. Payor Inc. and Recipient Co. have an exchange with no commercial substance. The asset given up by Payor Inc. has a book value of P12,000 and a fair value of P15,000. The asset given up by Recipient Co. has a book value of P20,000 and a fair value of P19,000. Boot of P4,000 is received by Recipient Co. 7.

Payor Inc. should record the asset received at

8.

Recipient Co. should record the asset received at

9.

A used delivery truck was traded in for a new truck. Information relating to the trucks follows: Used truck: Cost Accumulated depreciation Estimated current fair value New truck: List price Cash price without trade-in Cash price with trade-in

P1,600,000 1,200,000 320,000 2,000,000 1,900,000 1,560,000

The amount that should be capitalized as the cost of the new truck is

10. The Royal Furniture Mfg. Co. fabricated furniture and fixtures for its office use in the company’s plant during 2015. The following data were taken from the company’s records: Finished goods Office furniture & fixtures

Materials P100,800 67,200

Direct Labor P151,200 50,500

Factory overhead amounted to P134,000. Normal production of finished goods results to 420 units. Due to the fabrication of office furniture and fixtures, finished goods produced totaled 294 units only in 2015. The assets are to be charged with the overhead which would have been apportioned to the 126 units which were not produced. What is the total cost of office furniture and fixtures? 11. On May 1, 2015, Lenny Corporation purchased for P690,000 a tract of land on which a warehouse and office building were located. The following data were collected concerning the property: Current Assessed Vendor's Valuation Original Cost Land P280,000 P180,000 Warehouse 320,000 315,000 Office Building 200,000 129,000 P800,000 P624,000 Determine the appropriate amount that Lenny should charge to land. 12. Reiley Co. purchased land as a factory site for P1,000,000. Reiley paid P40,000 to tear down two buildings on the land. Salvage was sold for P5,400. Legal fees of P3,480 were paid for title investigation and making the purchase. Income of P8,000 was earned through using the land as a car park before construction started. Architect's fees were P41,200. Title insurance cost P2,400, and liability insurance during construction cost P2,600. Excavation cost P10,440. The contractor was paid P2,400,000. An assessment made by the city for pavement was P6,400. Interest costs during construction were P170,000. The cost of the land that should be recorded by Reiley Co. is 13. The following expenditures were incurred by Lyon Enterprises Co. in 2015: Purchase of land Land survey Fees for search of title for land Building permit

P3,900,000 52,000 6,000 35,000

Temporary quarters for construction crews Payment to tenants of old building for vacating premises

107,500

Razing old building

470,000

Excavating basement

100,000

46,000

Special assessment tax for street project

20,000

Dividends Damaged awarded for injuries sustained in construction (no insurance was carried)

50,000

Costs of construction

84,000 29,000,000

Cost of paving parking lot adjoining building

400,000

Cost of shrubs, trees, and other landscaping

330,000

Determine the cost of the new building in accordance with PIC Q&A 2012-2 14. Dasmariñas Company has a production assembly line to manufacture furniture. In 2015 Dasmariñas purchased a new machine and rearranged the assembly line to install this machine. The rearrangement did not increase the estimated useful life of the assembly line but it did result in significantly more efficient production. The following expenditures were incurred in connection with this project: Machine Labor to install new machine Parts added in rearranging the assembly line to provide future benefits Labor and overhead to rearrange the assembly line

P5,000,000 400,000 2,000,000 600,000

What amount of the above expenditures should be capitalized in 2015? 15. On April 1, 2015, the new machinery was ordered at a quoted price of P56,000. On July 1, 2015, it arrived at Dodik Corp.’s plant with an actual invoice price of P58,000, which it paid immediately. During July 2015, a new concrete platform was constructed at a cost of P4,000 to properly install the machine. In August 2015, testing was performed at a cost of P7,000 to ensure the machine was operating properly. On August 31, 2015, the machine was entered into service. Minor repairs and maintenance costs on the new machine amounted to P3,000 in September 2015. No other costs were incurred prior to December 31, 2015. Similar machinery is depreciated on a straight-line basis over 10 years and typically has no residual value. What should be the depreciation expense for the year ended 31 December 2015? 16. The Seoul Company purchased an office equipment with a useful life of 10 years on 1 January 2015 for P6,500,000. At its year end of 31 December 2015, the amount the company would receive from the disposal of the asset if it was already of the age and in the condition expected at the end of its useful life was estimated at P700,000. Inclusive of inflation the actual amount expected to be received on disposal was estimated at P900,000. What should be the depreciation charge for the year ended 31 December 2015?

17. On January 1, 2013, Paete Company signed a 12-year lease for a building. Paete has an option to renew the lease for an additional 8-year period on or before January 1, 2017. During January 2015, Paete made substantial improvements to the building. The cost of the improvements was P3,600,000, with an estimated useful life of 15 years. At December 31, 2015, Paete intended to exercise the renewal option. Paete has taken a full year’s amortization on this improvement. What should be the depreciation charge for the year ended 31 December 2015? 18. Holdaway, Inc., a small furniture manufacturer, purchased the following assets at the end of 2015. Asset #

D.A.

Life

1

P24,000

Cost

P5,000

P19,000

5 years

2

900

130

770

7 years

3

320

-

320

8 years 5 years

4

R,V.

9,000

500

8,500

P34,220

P5,630

P28,590

The group depreciation rate is 19. Takatak, Inc., uses the group depreciation method for its furniture account. The depreciation rate used for furniture is 21%. The balance in the furniture account on December 31, 2014, was P125,000, and the balance in Accumulated Depreciation - Furniture was P61,000. The following purchases and dispositions of furniture occurred in 2015 (assume that all purchases and disposals occurred at the beginning of each year). Assets Sold Assets Purchased P35,000

Cost P27,000

Selling Price P8,000

The carrying amount of furniture at December 31, 2015 is 20. Bongabon Corporation acquired a machine at a total cost of P5,200,000. The estimated life of the machine is 8 years or a total of 100,000 working hours with no salvage value. The operating hours of the machine totaled: 2014, 5,000 hours; 2015, 12,000 hours. The company follows the working hours method of depreciation. On December 31, 2015, the carrying amount of the machine is 21. The Vientiane Company purchased a machine on 1 January 2014 for P81,000. The useful life of the machine is estimated at 3 years with a residual value at the end of this period of P6,000. During its useful life, the expected units of production from the machine are: 2014 2015 2016

12,000 units 7,000 units 5,000 units

What should be the depreciation expense for the year ended 31 December 2015, using the most appropriate depreciation method permitted by PAS16 Property, plant and equipment? 22. Blessing Corp. uses the sum-of-the-years’ digits method to depreciate equipment purchased in January 2013 for P20,000. The estimated residual value of the equipment is P2,000 and the estimated useful is four years. What should be the depreciation charge for the year ended 31 December 2015? 23. Cuyapo Company purchased a machine on January 2, 2012, for P500,000. The machine has an estimated useful life of eight years and a salvage value of P50,000. Depreciation was computed by the 200% declining-balance method. What should be the depreciation charge for the year ended 31 December 2015?