Property, plant and equipment

Are tangible assets that are held for use in Major characteristics
production or supply of goods or services, or for • Tangible asset
administrative purposes, and are expected to be • Used in business
used during more than one period.
• More than one year

Initial Measurement:
Cost – is the amount of cash or cash equivalent Elements of cost
paid and the fair value of the other consideration • Purchase price
given to acquire an asset at the time of • Directly attributable cost
acquisition or construction.
• Dismantling cost

2
 Property, plant and equipment
Costs that expense outright
Directly attributable cost

x Cost of opening a new facility

✓ Initial delivery and handling cost x Cost of introducing a new product or service, including cost
✓ Installation and assembly cost of advertising and promotion

✓ Cost of site preparation x Cost of conducting business in a new location or with a new
class of customer, including cost of staff training
✓ Professional fees
x Administration and other general overhead
✓ Cost of testing whether the asset is functioning x Cost incurred while an item is capable of operating in the
properly manner intended by the management has yet to be brought into
✓ Cost of employee benefits arising directly from the use or is operating at less than full capacity
acquisition. x Initial operating losses
x Cost of relocating or reorganizing part or all of an entity’s
operation.

3
Illustration: Acquisition on cash basis

ABC Co. acquired a factory equipment overseas on cash basis for P100,000.
Additional costs incurred include the following:

• Commission paid to brokers for the purchase of the equipment, P5,000 Purchase price 100,000
• Import duties, P25,000 Commission to brokers 5,000
• Non-refundable purchase taxes, P10,000 Import duties 25,000
• Freight cost of transferring the equipment to ABC Co.’s premises, P1,000 Non-refundable purchase taxes 10,000
• Cost of assembling and installing the equipment, P2,000 Transportation cost 1,000
• Cost of testing the equipment, P1,500 Assembling and installation costs 2,000
• Administration and other general overhead costs, P4,200 Testing costs 1,500
• Advertisement and promotion costs of new product to be to be produced Net proceeds from samples generated (500)
by the equipment, P3,800
• Samples generated from testing the equipment were sold at P500.
Initial cost of equipment 144,000

Compute for the initial cost of the equipment.

4
Illustration: Deferred settlement
Cash down payment 10,000
PV of note payable
On January 1, 2021, ABC Co. purchased fixtures with an installment price of Future cash flows * PV of ordinary annuity
120k /3 = 40,000 *2.401831 96,073
P130,000 by paying P10,000 down payment and issuing a three-year
Initial cost of fixtures 106,073
noninterest bearing note of P120,000 payable in three equal annual
installments starting December 31, 2021. The prevailing rate for the note as of Furniture and fixture 106,073
January 1, 2021 is 12%. Compute for the initial cost of the equipment. Discount on NP (120K -96,073) 23,927
Jan. 1, Cash 10,000
2021 Note payable 120,000

Interest Present
Note payable 40,000
Date Payments expense Amortization value Interest expense 11,529
Dec. 31, Discount on NP 11,529
1/1/21 96,073 2021 Cash 40,000
Note payable 40,000
12/31/21 40,000 11,529 28,471 67,602 Interest expense 8,112
Dec. 31, Discount on NP 8,112
12/31/22 40,000 8,112 31,888 35,714 2022 Cash 40,000
Note payable 40,000
12/31/23 40,000 4,286 35,714 0 Interest expense 4,286
Dec. 31, Discount on NP 4,286
2023 Cash 40,000
5
Classes of PPE
1. Land – used in entity’s operations
2. Land and buildings – land improvements, self-constructed Lump-sum
building and building improvements purchase

3. Machinery Allocate the individual assets based on their

4. Ships, aircraft and motor vehicles relative fair values at the date of purchase
5. Furniture and fixtures • Land and building – building is unusable,
6. Office equipment acquisition cost is allocated only to the land

7. Bearer plants • Both the land and building are classified as

inventory, of investment property measured at
fair value – the lump-sum cost is not allocated
(accounted for as single asset)

6
 Demolition costs

An old building is demolished to construct a new An old building is demolished to clear the land for a
building possible future sale

▪ The cost of demolishing or razing the old building is ▪ The demolition cost is capitalized only if it enhances
capitalized as cost of new building the benefit of the land, otherwise, it is charged to
▪ The carrying amount of the building demolished, if expenses (cost of disposal)
any, is recognized as loss ▪ Demolition cost is a prerequisite to the sale of the
▪ Proceeds from sale of salvaged materials from the land as inventory, treat as cost to sell at the lower of
demolition are deducted from the demolition cost cost and net realizable value
that is capitalized. ▪ Proceeds from sale of salvaged materials from the
demolition are deducted from the demolition cost
that is capitalized or expensed.

7
Illustration: Lum-psum acquisition
On April 1, 2021, ABC Co. purchased land and building for a lump-sum price
of P12,000,000. The existing building will be demolished and a new building
will be constructed.

Compute for the allocated costs of the different classes of PPE

Additional costs relating to the purchase include the following:
assuming:

Title guarantee 20,000 a. The land and old building have fair values of P5,000,000 and
P10,000,000, respectively; and
Option paid for the land and old building
b. The old building is unusable and has an insignificant fair value.
acquired 6,000
Payments to tenants to vacate premises 12,000
Cost of razing the old building (demolition
cost) 60,000
Proceeds from sale of salvaged materials 15,000
Fair value of materials salvaged from the
old building and used in the new building 30,000
Construction cost of new building
(completed) 8,500,000
8
 4,000,000
Illustration: Lump-sum acquisition Land
Building –old 8,000,000
Cash 12,000,000
Land Old building New building To record purchase in lump-sum

Total acquisition cost Land 26,000

(12M * 5/15); (12M *10/15) 4,000,000 8,000,000 - Building –old 12,000
Cash 38,000
Title guarantee 20,000 - - To record cost of title guarantee
Option paid for the land and old building Building –new 60,000
acquired Cash 60,000
2,000 4,000
(6K * 5/15); (6K *10/15) - To record the demolition cost
Payments to tenants to vacate premises 15,000
4,000 8,000 Cash
(12K * 5/15); (12K *10/15) - 15,000
Building –new
Cost of razing the old building (demolition To record the proceeds from sale
cost) - - 60,000 of salvaged materials

Proceeds from sale of salvaged materials - - (15,000) Building –new 8,500,000

Cash 8,500,000
Fair value of materials salvaged from the To record construction costs
old building and used in the new building - - -
Loss on derecognition of
Construction cost of new building asset 8,012,000
(completed) - - 8,500,000 Building –old 8,012,000
4,026,000 8,012,000 To record the cost of the old
Totals 8,545,000 building demolished
9
Acquisition of asset
Measurement based on
1. With commercial substance – subsequent cash flows are expected
▪ Acquisition through exchange – may be a to change as a result of the exchange
combination of monetary and non-
monetary asset
• Fair value of the asset given up (+ cash paid/ - cash received)
• Fair value of the asset received
• Carrying amount of the asset given up

2. Lacks commercial substance – carrying amount of the asset given

up

▪ Acquisition through trade-in – made by an Measured using the following order or priority
entity with a seller 1. Fair value of the asset given up (+ cash paid)
2. Fair value of asset received (cash price without trade-in)

10
Acquisition of asset
▪ Acquisition through issuance of own equity Measured using the following order or priority
instrument 1. Fair value of asset received
2. Fair value of equity instrument issued

▪ Acquisition through issuance of bonds Measured using the following order or priority
payable 1. Fair value of asset received
2. Fair value of bonds payable issued

▪ Acquisition by donation Measured at fair value and accounted for as:

▪ Income – donor is unrelated party
▪ Donated capital – donor is an owner or shareholder
▪ Government grant – donor is the government
11
Illustration: Exchange of equipment
ABC Co. (Payor)
ABC Co. exchanged equipment with XYZ, Inc. Pertinent data are shown
below:
Fair value of asset given up 950,000
ABC Co. XYZ Inc. Add: Cash paid 150,000
Equipment 1,000,000 2,000,000 Cost of asset received by ABC Co. 1,100,000
Accumulated depreciation 200,000 800,000
Fair value of asset given up 950,000
Carrying amount 800,000 1,200,000
Carrying amount of asset given up
Fair value 950,000 1,100,000 (1M -200K) (800,000)
Cash paid by ABC Co. to XYZ Inc. 150,000 150,000 Gain on exchange 150,000

Provide the journal entries in the books of ABC Co. and XYZ, Inc. to record the Equipment -new 1,100,000
exchange transactions. Accumulated depreciation 200,000
Equipment -old 1,000,000
Cash 150,000
Gain on exchange 150,000
To record the exchange on
equipment
12
Illustration: Exchange of equipment
XYZ Inc. (Payee)

1,100,000 Case 2
Fair value of asset given up
Using the same information except that ABC Co. cannot determine the fair
Less: Cash paid (150,000)
value of the equipment given up but the is aware that the equipment that
Cost of asset received by XYZ Inc. 950,000 received from XYZ Inc. has a fair value of P1,100,000.

Fair value of asset given up 1,100,000

Carrying amount of asset given up Use the next measurement basis in order of priority which is the fair value of
(2M -800k) (1,200,000) asset received without adjustment for any cash paid or received.
Loss on exchange 100,000

Equipment –new 950,000

Cash 150,000
Accumulated depreciation 800,000
Loss on exchange 100,000
Equipment -old 2,000,000
To record the exchange on
equipment
13
Illustration: Exchange of equipment
Case 3
ABC Co. (Payor) Using the same information except that the exchange has no commercial
substance

Fair value of asset received 1,100,000 ABC Co. (Payor)

Less: Cash paid (150,000) 950,000
Equipment –new (800k+150k)
Assumed fair value of asset given up 950,000 Accumulated depreciation 200,000
Equipment -old 1,000,000
Carrying amount of asset given up 800,000 150,000
Cash
Gain on exchange 150,000 To record the exchange on
equipment

1,100,000 XYZ Inc. (Payee)

Equipment -new
Accumulated depreciation 200,000
Equipment -old 1,000,000 Equipment –new (1.2M -150k) 1,050,000
Cash 150,000 Cash 150,000
Gain on exchange 150,000 Accumulated depreciation 800,000
To record the exchange on Equipment -old 2,000,000
equipment To record the exchange on
equipment

14
Illustration: Acquisition through issuance of own equity instrument

ABC Co. acquired land with fair value of P1,000,000 by issuing Land 1,000,000
10,000 shares with par value of P10 per share and quoted price of Share capital (10K* P10) 100,000
P90 per share. Share premium 900,000
To record the acquisition

Case 2 Land (10K *P90) 900,000

Assuming that the fair value of the land is indeterminable. Share capital (10K* P10) 100,000
Share premium 800,000
To record the acquisition

15
Illustration: Acquisition through issuance of bonds payable

On January 1, 2021, ABC Co. acquired land with fair value of Land 950,000
P950,000 by issuing a 3-year, 10%, P1,000,000 bonds. Principal is Discount on bonds payable 50,000
due on January 1, 2024 but interest is due at each year end. The Bonds payable 1,000,000
prevailing market rate of interest for a similar instrument on To record the acquisition

January 1, 2021 is 12%. The PV of the future cash flows from the
bonds discounted at 12% is P951,963.

Case 2 Land 951,963

Assuming that the fair value of the asset received is Discount on bonds payable 48,037
Bonds payable 1,000,000
indeterminable. To record the acquisition

16
Illustration: Acquisition by donation

ABC Co. received donation of equipment from XYZ, Inc., an Equipment 1,000,000
unrelated foreign corporation. The equipment has a fair value of Cash 10,000
P1,000,000. Necessary costs incurred by ABC Co. to bring the Income from donation 990,000
asset to its intended condition for use amounted to P10,000. To record the receipt of donation

Case 2 Equipment 1,000,000

Cash 10,000
Assuming the donor is a shareholder of ABC Co. Donated capital 990,000
To record the receipt of donation

17
Next topic:
Property, plant and equipment
(Part 2)

18
Subsequent measurement - PPE

Cost model – PPE is carried at its cost less any accumulated depreciation and any
accumulated impairment losses.

Depreciation – systematic allocation of the depreciable amount of an asset over its useful
life
▪ Depreciable amount Factors to consider in determining the useful life
➢ Expected usage of the asset
▪ Residual value
➢ Expected physical wear and tear
▪ Useful life ➢ Obsolescence
➢ Legal and limitation on the use of the asset

19
 Depreciation methods
▪ Straight line method ➢ Used when the depreciation is caused by the passage of time
➢ Depreciation is recognized evenly over the useful life of the asset

Annual depreciation = Depreciable amount / Useful life

▪ Sum of the years’ digits method (SYD) ➢ Depreciation is computed by applying a series of fractions to the
depreciable amount of the asset
➢ A fraction is derived by dividing the assets remaining useful life by the
sum of digits in the life of the asset

SYD Life + 1
Life
denominator = 2

20
 Depreciation methods
▪ Double declining balance method ➢ Depreciation is computed by applying a fixed rate on the carrying
amount of the asset at the end of each period.
➢ Residual value is initially ignored

Double 2
declining rate = Life

▪ Units of production method ➢ Relates depreciation to the estimated production capability of an asset
and is expressed in a rate per unit of output or per hour of input.
➢ Periodic depreciation varies in proportion with the number of units
produced – when asset is not used during a period, no depreciation is
recognized.

21
Illustration: Depreciation (Straight line method)

Initial cost of equipment 100,000

On January 1, 2021, ABC Co. acquired equipment with
an estimated useful life of 4 years and a residual value Residual value (20,000)
of P20,000 for a total purchase cost of P100,000. Depreciable amount 80,000
Compute the depreciation expense using the straight Divided by: Estimated useful life 4
line method. Annual depreciation 20,000

Accumulated Carrying
Dec. 31, Depreciation expense 20,000 Depreciation depreciation amount
2021 Accumulated depreciation 20,000 Date (a) (b) (Cost – b)
Jan. 1, 2021 100,000
Dec. 31, Depreciation expense 20,000
Dec. 31, 2021 20,000 20,000 80,000
2022 Accumulated depreciation 20,000
Dec. 31, 2022 20,000 40,000 60,000
Dec. 31, 2023 20,000 60,000 40,000
Dec. 31, 2024 20,000 80,000 20,000

22
Illustration: Depreciation (SYD method)
On January 1, 2021, ABC Co. acquired equipment with
an estimated useful life of 4 years and a residual value
Depreciable SYD
of P20,000 for a total purchase cost of P100,000.
amount rate Depreciation Accumulated
Compute the depreciation expense using the sum of the Date (a) (b) (c = a * b) depreciation
years’ digit method. Jan. 1, 2021

Initial cost of equipment 100,000 Dec. 31, 2021 80,000 4/10 32,000 32,000

Residual value (20,000) Dec. 31, 2022 80,000 3/10 24,000 56,000

Depreciable amount 80,000 Dec. 31, 2023 80,000 2/10 16,000 72,000
Dec. 31, 2024 80,000 1/10 8,000 80,000
SYD Life + 1
Life
denominator = 2 Dec. 31, Depreciation expense 32,000
2021 Accumulated depreciation 32,000
SYD 4+1
4
denominator = 2
Dec. 31, Depreciation expense 24,000
2022 Accumulated depreciation 24,000
SYD denominator = 10

23
Illustration: Depreciation (Double declining method)
On January 1, 2021, ABC Co. acquired equipment with Carrying Accumulated
Double
an estimated useful life of 5 years and a residual value declining rate amount Depreciation Depreciation
of P20,000 for a total purchase cost of P100,000. Date (a) (b) (c) (d)
Compute the depreciation expense using the double Jan. 1, 2021
declining method. Dec. 31, 2021 40% 100,000 40,000 40,000
Dec. 31, 2022 40% 60,000 24,000 64,000
Double 2 Dec. 31, 2023 40% 36,000 14,400 78,400
declining rate = Life 21,600
Dec. 31, 2024 N/A -20,000 1,600 80,000
Double 2
Dec. 31, 2025 N/A 20,000 0 80,000
declining rate = 5
Dec. 31, Depreciation expense 40,000
Double declining rate = 40% 2021 Accumulated depreciation 40,000

Dec. 31, Depreciation expense 24,000

2022 Accumulated depreciation 24,000

24
Illustration: Depreciation (Units of production method)
On January 1, 2021, ABC Co. acquired factory Output method
equipment with an estimated residual value of P20,000
for a total purchase cost of P100,000. The equipment Dep. rate = Depreciable amount / Est. total units of output
has an expected total output of 160,000 units and an
Dep. rate = 80,000 / 160,000 = .50 per unit of output
expected total input of 40,000 hours.
Dep. Rate * Accumulated Carrying
Year Units of output Depreciation depreciation amount
Information on actual operations is presented below:
2021 60,000 * .50 30,000 30,000 70,000
Manufacturing
Year Units produced hours 2022 30,000 * .50 15,000 45,000 55,000

2021 60,000 16,000 2023 45,000 * .50 22,500 67,500 32,500

2022 30,000 8,000 2024 25,000 * .50 12,500 80,000 20,000

2023 45,000 12,000

Input method
2024 25,000 4,000
Total 160,000 40,000 Dep. rate = Depreciable amount / Est. total hours of input
Dep. rate = 80,000 / 40,000 = 2 per hour of input
25
Leasehold improvements

➢ Leasehold improvements are modifications made by a tenant to a property leased under an

operating lease.
➢ Necessary renovations and remodeling to bring the rented property to a condition intended
for use.
➢ These are immovable improvements that they are necessarily transferred without charge to
the landlord upon the expiration of the lease, therefore, residual value is ignored.
➢ Debited to a “Leasehold improvement” account and depreciated over the useful life of the
improvements or the remaining lease term, whichever is shorter.

26
Illustration: Leasehold improvements
Cost of general improvements 900,000
Divided by: Useful life
On January 1, 2021, ABC Co. signed a ten-year lease for office 10 yrs – Office space
space. ABC has the option to renew the lease for an additional 9 yrs – Improvements
9 years
five year period on or before January 1, 2031. During the first half Whichever is shorter
of January 2022, ABC Co. incurred the following costs:
Annual depreciation on leasehold
improvement 100,000

• P900,000 for general improvements to the leased premises

with an estimated useful life of 10 years. Assuming that ABC Co. is certain that it will exercise the renewal
• P100,000 for office furniture and equipment with an estimated option.
useful life of 10 years.
• P200,000 for movable assembly line equipment with useful life Cost of general improvements 900,000
of 5 years. Divided by: Useful life
At the leasehold improvement were finished, ABC Co. is 15 yrs – Office space
10 yrs – Improvements
uncertain as to the exercise of the renewal option. Whichever is shorter 10 years
Annual depreciation on leasehold
improvement 90,000

27
Changes in depreciation method, useful life and residual value

➢ Change in accounting estimate accounted for prospectively – the change affects only the current
and/or future periods and the change does not affect past periods.

Step 1: Determine the carrying amount of the asset as at the beginning of the period of change.
Step 2: Depreciate the computed carrying amount taking into account any changes in depreciation
method, useful life or residual value.

28
Illustration: Change in depreciation method

On January 1, 2021, ABC Co. acquired machinery for a total cost Carrying amount as of January 1, 2024
of P20,000,000. The machinery is depreciated using the double (20M *80% *80% *80%) 10,240,000
declining balance method over a period of 10 years. On January
Divide by: Remaining useful life
1, 2024, ABC Co. changed its depreciation method to straight line (10 yrs – 3 yrs) 7
method.
Straight line depreciation 1,462,857
Double declining balance rate = 2 /Useful life
= 2 /10 = 20%

Cost 20,000,000
On January 1, 2021, ABC Co. acquired machinery for a total cost Acc. Depreciation [20M *(10+9+8) /55] (9,818,182)
of P20,000,000. The machinery is depreciated using the SYD
Carrying amount as of Jan. 1, 2024 10,181,818
method over a period of 10 years. On January 1, 2024, ABC Co.
changed its depreciation method to double declining method.
Carrying amount as of Jan. 1, 2024 10,181,818
Multiply by: Double declining rate
SYD denominator = Life * [(Life +1) /2] 28.57%
(2 / 7 remaining life)
= 10 * [(10 +1) /2] = 55
Double declining depreciation in 2024 2,908,945
29
Illustration: Change in useful life and residual value

Carrying amount as of January 1, 2024

On January 1, 2021, ABC Co. acquired machinery for a total cost [(20M -2M) * 7/10 +2M] 14,600,000
of P20,000,000 and estimated residual value of P2,000,000. The
Revised residual value (2,600,000)
machinery is depreciated using the straight line method over a
period of 10 years. On January 1, 2024, ABC Co. revised the total Revised depreciable amount 12,000,000
useful life of the asset to 15 years from acquisition date and the
Divided by: Revised remaining useful life
residual value to P2,600,000. (15 yrs -3 yrs expired) 12

Depreciation expense 1,000,000

Dec. 31, Depreciation expense 1,000,000

2024 Accumulated depreciation 1,000,000

30
Subsequent expenditures

Revenue expenditure
➢ Day to day expenses and costs incurred after an asset is already capable of operating.
➢ Costs to maintain or to bring back an asset to its original capacity or efficiency.
➢ Expense immediately.

Capital expenditure
➢ Cost of an asset which (a) it is probable that future economic benefits will flow to the entity and the
(b) cost can be measured reliably
➢ Future benefit may be in the form of (a) an extension in the assets’ useful life or (b) an increase in
the assets’ capacity or efficiency beyond its original capacity or efficiency.
➢ Additions, improvements, replacements

31
Illustration: Subsequent expenditures
Assume that the cost of the old part that is replaced is P500,000.

Accumulated depreciation (500K *4/10) 200,000

Loss on replacement 300,000
ABC Co. acquired an aircraft from XYZ, Inc. on January 1, 2021 Jan. 1, Equipment –aircraft 500,000
for a total cost of P6,000,000. The aircraft is estimated to have a 2025 To derecognized the old part that is replaced
useful life of 10 years. ABC Co. uses the straight line method of
depreciation. On January 1, 2025, a major part of the equipment Equipment –aircraft (new part) 800,000
was replaced for a total cost of P800,000. Jan. 1, Cash 800,000
2025 To recognized the new replacement part

Assume that it is impracticable to determine the cost of the old part

that is replaced.

Accumulated depreciation (800K *4/10) 320,000

Loss on replacement 480,000
Jan. 1, Equipment –aircraft 800,000
2025 To derecognized the old part that is replaced

Equipment –aircraft (new part) 800,000

Jan. 1, Cash 800,000
2025 To recognized the new replacement part
32
Subsequent measurement - PPE

Revaluation model – an item of PPE whose fair value can be measured reliably shall be carried at a revalued amount,
being its fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment losses.

Basis for revaluation

▪ Highest and best use ➢ Physical characteristics, legal restrictions and financial feasibility

▪ Fair value hierarchy ➢ Consistency and comparability of fair values

Quoted prices for identical assets/

Level 1 liabilities on active market Most reliable
Through corroboration with observable
Level 2 data
Unobservable inputs (entity’s own data Least reliable
Level 3 or assumptions.

▪ Valuation technique ➢ Maximize the use of relevant observable inputs and

minimizes unobservable inputs. 33
Illustration: Cost approach
Total economic life = Effective life + Remaining economic life
= 20 +40 = 60
On December 31, 2021, the building of ABC Co. with historical
cost of P20,000,000 and accumulated depreciation of Percentage depreciation = Effective life / Total economic life
P10,000,000 is estimated to have a replacement cost of = 20 / 60 = 33 1/3%
P42,000,000. Additional information follows:
Depreciation = Percentage depreciation x Replacement cost
Actual life 25 years = 33 1/3% * P42,000,000 = P14,000,000
Effective life 20 years
Fair value = Replacement cost – Depreciation
Remaining economic life 40 years
= 42,000,000 – 14,000,000 = 28,000,000
Income tax rate 30%
Revaluation surplus

Provide the entry to record the revaluation surplus under each of Fair value 28,000,000
the following methods:
Less: Carrying amount (20M -10M) (10,000,000)
a. Proportional method
Revaluation surplus – gross of tax 18,000,000
b. Elimination method
Less: Deferred tax (18M *30% (5,400,000)
Revaluation surplus – net of tax 12,600,000
34
Illustration: Cost approach
Proportional method Elimination method
The movements in the accounts are determined as follows:

Replacement Accumulated depreciation 10,000,000

Historical cost cost Increase Building 8,000,000
Dec 31, Revaluation surplus 12,600,000
Building 20,000,000 42,000,000 22,000,000
2021 Deferred tax liability 5,400,000
Accumulated depreciation (10,000,000) (14,000,000) (4,000,000)
10,000,000 28,000,000 18,000,000
The balances of the PPE accounts are:
Building 22,000,000 Building 28,000,000
Accumulated depreciation 4,000,000
Dec 31, Revaluation surplus 12,600,000 Accumulated depreciation -
2021 Deferred tax liability 5,400,000 Carrying amount after revaluation 28,000,000

The balances of the PPE accounts are:

Building 42,000,000
Accumulated depreciation (14,000,000)
Carrying amount after revaluation 28,000,000
35
Illustration: Market approach
On December 31, 2021, the building of ABC Co. with historical Proportional method
cost of P20,000,000 and accumulated depreciation of P5,000,000
is estimated to have a replacement cost of P24,000,000. Income The change in CA is determined as follows:
tax rate is 30%.
Historical cost Fair value % change
Provide the entry to record the revaluation surplus under each of Building 20,000,000
the following methods:
Accumulated depreciation (5,000,000)
a. Proportional method
Carrying amount 15,000,000 24,000,000 160%
b. Elimination method

The accounts are proportionately adjusted as follows:

Revaluation surplus
Revalued
Fair value 24,000,000 Historical cost % change amounts
Less: Carrying amount (20M -5M) (15,000,000) Building 20,000,000 160% 32,000,000
Revaluation surplus – gross of tax 9,000,000 Accumulated depreciation (5,000,000) 160% (8,000,000)
Less: Deferred tax (9M *30% (2,700,000) Carrying amount 15,000,000 24,000,000
Revaluation surplus – net of tax 6,300,000
36
Illustration: Market approach

Proportional method
The balances of the PPE accounts are:
Building (32M -20M) 12,000,000
Accumulated depreciation Proportional Elimination
(8M -5M) 3,000,000
Dec 31, Revaluation surplus 6,300,000 Building 32,000,000 24,000,000
2021 Deferred tax liability 2,700,000 Accumulated depreciation (8,000,000) -
Carrying amount (equal to
fair value) 24,000,000 24,000,000
Elimination method

Accumulated depreciation 5,000,000

Building 4,000,000
Dec 31, Revaluation surplus 6,300,000
2021 Deferred tax liability 2,700,000

37
Subsequent accounting for revaluation surplus

➢ Initially recognized in other comprehensive income unless represents impairment loss

which is recognized in profit or loss.

Subsequent to initial recording

➢ Asset revalued in non-depreciable – revaluation surplus is transferred directly to
retained earnings when the asset is derecognized.
➢ Asset revalued is depreciable – portion of the revaluation surplus is transferred
periodically to retained earnings as the asset is being used.

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Illustration: Revaluation of depreciable asset
On December 31, 2021, the building of ABC Co. with historical Journal entries
cost of P20,000,000 and remaining useful life of 10 years has
been determined to have a fair value of P35,000,000. Income tax Dec 31, Depreciation expense 3,500,000
rate is 30%. ABC Co. depreciates its buildings using the straight 2022 Acc. Depreciation 3,500,000
line method. Compute the revaluation surplus.
Revaluation surplus (1.5M *.70) 1,050,000
Revaluation surplus Deferred tax liability (1.5M *.30) 450,000
Retained earnings 1,050,000
Fair value 35,000,000 450,000
Income tax payable
Less: Carrying amount (20M -5M) Dec 31, To record the piecemeal realization
(20,000,000)
2022 of revaluation
Revaluation surplus – gross of tax 15,000,000
Less: Deferred tax (15M *30% (4,500,000) Alternate solution:
Revaluation surplus – net of tax 10,500,000
Revaluation surplus Deferred tax
(net of tax) liability
Depreciation based on FV
(35M /10) 3,500,000 Original balances 10,500,000 4,500,000
Depreciation based on Historical cost Divide by: Remaining useful life 10 years 10 years
(2,000,000)
(20M/ 10) Annual transfer/ reversal 1,050,000 450,000
Difference 1,500,000
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Illustration: Revaluation and reversal of impairment loss

On December 31, 2021, the land of ABC Co. with an original cost
of P10,000,000 has been determined to have a fair value of
P7,000,000. This was the first revaluation made on the land since
it was purchased 2 years ago. On December 2024, the land has
been determined to have a fair value of P12,000,000.

December 31, 2021 December 31, 2024

Fair value 7,000,000 Fair value 12,000,000

Less: Carrying amount (10,000,000) Less: Carrying amount (7,000,000)

Decrease in carrying amount (3,000,000) Increase in carrying amount 5,000,000

Dec 31, Impairment loss 3,000,000 Land 5,000,000

2021 Land 3,000,000 Dec 31, Gain on impairment reversal 3,000,000
2024 Revaluation surplus 2,000,000

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Derecognition

The carrying amount of an item of PPE shall be derecognized:

a. On disposal; or
b. When no future economic benefits are expected from its use or disposal

➢ The gain or loss on derecognition shall be determined as the difference between the net
disposal proceeds, if any, and its carrying amount and shall be included in the profit or loss.

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Illustration: Derecognition of PPE
Sale of PPE under cost model

ABC Co. purchased equipment on August 14, 2021 for a total Cash (30k-2k) 28,000
cost of P100,000. The equipment has an estimated useful life of Accumulated depreciation 24,000
10 years and residual value of P20,000. It is the policy of ABC May 12, Loss on disposal of equip. 48,000
Co. to provide full year depreciation in the year of acquisition and 2024 Equipment 100,000
none in the year of disposal. On May 12, 2024, the equipment
was sold for P30,000. Additional costs incurred on the sale
amounted to P2,000.

Sale of PPE under revaluation model

ABC Co. disposed on a machinery on Dec. 31, 2021 for a total Cash 1,700,000
net disposal proceeds of P1,700,000. Information of the Accumulated depreciation 800,000
machinery as of Dec. 31, 2021 is as follows: Dec. 31, Machinery 2,300,000
2021 Gain on disposal 200,000

Cost od revalued amount 2,300,000 Dec. 31, Revaluation surplus 1,200,000

2021 Retained earnings 1,200,000
Accumulated depreciation 800,000
Revaluation surplus 1,200,000
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Next topic:
Depletion of Mineral Resources

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