STUDY GUIDE INTERMEDIATE ACCOUNTING I FINAL PERIOD

Set Four
Chapter 23 Property, Plant, and Equipment
What is property, plant, and equipment?
Property, plant, and equipment: (a) tangible assets held for use in (b) production, supply, for rental, or for
administrative purposes; (c) expected to be used for more than one period.

Examples of property, plant, and equipment

a. land b. motor vehicle
b. land improvements c. furniture and fixtures
c. building i. office equipment
d. machinery j. patterns, molds, and dies
e. ship k. tools
f. aircraft l. bearer plants

How is PPE recognized?

a. Future economic benefits will flow to the entity
b. Asset cost can be measured reliably

Accounting for PPE

Initial measurement Subsequent measurement
Acquisition cost 1. Cost model:
acquisition cost
Elements of cost: less: accumulated depreciation
accumulated impairment loss
a. Purchase price
2. Revaluation model:
[after deducting trade discount and fair value [revaluation date]
rebate] less: accumulated depreciation
b. Directly attributable costs accumulated impairment loss
c. Initial estimate of cost [subsequent to rev. date]
= carrying amount [revalued]
[dismantling and removing asset]

Acquistion Costs for PPE

1. Cash basis 1. Exchange
2. On account [subject to cash discount] 2. Donation
3. Installment basis 3. Government grant
4. Issuance of share capital 4. Exchange
5. Issuance of bonds payable
STUDY GUIDE INTERMEDIATE ACCOUNTING I FINAL PERIOD

Accounting for acquisition costs

Cost Initial measurement Subsequent measurement
1) Cash basis 1. Single asset acquired:
cash paid
add: directly attributable costs
Total cost of asset
2. Several assets acquired: 2. [several asssets acquired]
[basket/lump sum price]: a. Allocate acquisition cost:
a) Asset 1 Acquisition cost
add: Asset 2... mult. fraction
[FV of asset/lump sum]
Lump sum of assets Allocated cost
2) On account 1. Record for acquisition 2. Record for payment:
[net/gross amount]: a) Within discount period:
dr. Asset acquired dr. Accounts payable [gross/net]
cr. Accounts payable cr. Cash
Asset acquired [disc% x PP]
b) Beyond discount period:
dr. Accounts payable [gross/net]
purchase discount lost
cr. Cash
asset acquired
3) Installment basis
a) Avail. CP 1. Record for acquisition [CP]: 2. Record [first] installment:
dr. Asset [CP] dr. Note payable [IP – down/# of periods]
disc. on NP [IP – CP] cr. Cash
cr. Note payable 3. Record for amortized disc:
cash [downpayment] dr. Interest expense
cr. Discount on NP
{[NP of year/lump sum] x discount}
b) No avail. CP 1. Record for acquisition [CP]: 2. Record for first installment:
a. Total cost of asset = [same for method a.]
Down payment
add: PV of NP 3. Record for amortized disc:
{[IP – PV [DP/# periods] x PV rt.} [amortization table]
> dr. asset a) interest = PV x % int. rt.
b. Implied interest =
b) Principal = installment – interest
note payable
c) PV [subsequent] =
less: PV of NP
PV [prec] - principal
> dr. Interest expense
IP = installment payment
CP = cash price
STUDY GUIDE INTERMEDIATE ACCOUNTING I FINAL PERIOD

4) Acquisition on issuance of share capital 5) Acquisition on issuance of bonds payable

Order of priority: Order of priority:
a. FV of property received [preferred] a. FV of bonds payable [preferred]
b. FV of share capital b. FV of asset received
c. Par/stated value of the share capital c. Face amount of bonds payable
a. Record for FV of property received: a. Record for FV of bonds payable:
Asset xxx Asset xxx [quoted price]

Share capital xxx Bonds payable xxx [face amount]

[# of shares x par val.]
Premium on BP xxx
[quoted price – face amount]
Share premium xxx b. Record for FV of asset received:
b. Record for FV of share capital: Asset xxx [FV of asset]
Asset xxx Bonds payable xxx [face amount]
[# of shares x quoted price]
Premium on BP xxx
Share capital xxx
[FV – face amount]
[# of shares x par value]
c. Record for face amount of BP:
Share premium xxx
Asset xxx [face amount]
c. Record for par/stated val. of share
Bonds payable xxx
capital:
Asset xxx
[# of shares x par val.]
Share capital xxx
Fair value – par value = premium
STUDY GUIDE INTERMEDIATE ACCOUNTING I FINAL PERIOD

6) Exchange (A) Books of Payor (B) Books of Recipient

[add cash payment] [less cash payment]
[with commercial substance = both 1 & 2] [with commercial substance = both 1 & 2]
1) FV asset given 1) FV asset given
add: cash payment less: cash payment
Cost of new asset Cost of new asset
2) [with commercial substance] 2) [with commercial substance]
FV of asset given FV of asset given
less: carrying amount less: carrying amount
Loss on exchange Gain on exchange

[with commercial substance] [with commercial substance]

dr. Equipment – new dr. Equipment – new
Accumulated depreciation Cash
Loss on exchange Accumulated depreciation
cr. Equipment – old cr. Equipment – old
Cash Gain on exchange
[without commercial substance] [without commercial substance]
dr. Equipment – new dr. Equipment – new
Accumulated depreciation Accumulated depreciation
cr. Equipment – old Cash [cash paid]
Cash [cash paid] cr. Equipment – old
7) Trade in (A) Fair value approach (B) Trade in value approach
1) FV asset given 1) Trade in value asset given
add: cash payment add: cash payment
Cost of new asset Cost of new asset
2) FV asset given [equal to list price]
less: carrying amount 2) Trade in value asset given
Loss on exchange less: carrying amount
Gain on exchange

dr. Equipment – new dr. Equipment – new

Accumulated depreciation Accumulated depreciation
Loss on exchange cr. Equipment – old
cr. Equipment – old Cash
Cash Gain on exchange
[Trade in value + cash payment = list price]
STUDY GUIDE INTERMEDIATE ACCOUNTING I FINAL PERIOD

8) Donations and Government Grants

Accounting for donations is only referenced in the local Philippine GAAP and not in the IFRS.

Initial Measurement Subsequent Measurement

Donations Record at FV: 1) Expenses charged against donated capital
cr. Donated capital dr. Expense
2) Direct. attributable costs are capitalized
Government Grants a) Considered subsidy: c) [not considered subsidy]:
[gift/grant received by record at FV 2. initial restrictions are met
nonshareholders] cr. Income recognize liability as income
b) Not considered subsidy: cr. Income
1. cr. Liability

9) Construction
[uses the same principles for acquired asset]

Costs for construction:

1) Direct cost of materials
2) Direct cost of labor
3) Indirect cost and incremental [manufacturing] overhead traceable to construction

Computation: Overhead Allocation

Initial Measurement Lump sum of costs for constructed asset xxx
[compute for lump sum] add: Lump sum of costs for finished goods xxx
Lump sum of totals for constructed asset and finished goods xxx

Subsequent Measurement [overhead is allocated to constructed asset based on direct labor costs]
[allocation of overhead] a. Compute for lump sum of direct labor costs:
Direct labor cost of constructed asset xxx
add: direct labor cost of finished goods xxx
Total xxx
b. Allocate overhead costs to constructed asset:
[DLC of CA/Total] x Total of Manufacturing Overhead xxx
[DLC of FG/Total] x Total of Manufacturing Overhead xxx
Total of Manufacturing Overhead xxx

DLC = direct labor cost total of manufacturing overhead = constructed asset + finished goods
CA = constructed asset
FG = finished goods

Construction cost < PP of construction = saving

Construction cost > PP of construction = record at cost
STUDY GUIDE INTERMEDIATE ACCOUNTING I FINAL PERIOD

When is PPE derecognized?

The carrying amount of PPE is derecognized on disposal or when no future benefits are expected to arise from
use/disposal:
• Cost of PPE = removed
• Accumulated depreciation = removed
• Gain/loss from derecognition = net disposal proceeds – carrying amount
o Included in profit/loss

Other PPE
Property Held for Sale Idle or Abandoned Property
Asset is immediately available for sale within one Asset with temporary idle activity or
year from date of classification. abandonment, to be used until the end of
[not depreciated] economic life.
a. Current asset: Optional disclosures:
excluded from PPE a. Carrying amount of temporary PPE
classified as held for sale b. Gross carrying amount of fully
depreciated PPE still in use
b. Noncurrent asset:
c. Carrying amount of PPE held for sale
measured at lower between CA and FV
less cost of disposal
STUDY GUIDE INTERMEDIATE ACCOUNTING I FINAL PERIOD

Chapter 24 Government Grant

What is government grant?
Government grant [subsidy, subvention, premium]: government assistance in the form of transfer of resources
to an entity in return for compliance with certain conditions in relation to the entity’s operating activities.

Government grants are recognized when:

(A) Entity complies with conditions attached to grant
(B) Grant is received

Accounting for government grants

(A) Grant in recognition of specific expenses: recognize as income over period of related expenses.
(B) Grant related to depreciable asset: recognize as income in proportion to depreciation of related asset.
(C) Grant related to non depreciable asset: recognize as income over the periods in which conditions
associated with the asset are met.
(D) Grant receivable as compensation for expenses: recognized as income when it becomes receivable

Grant Related to Income Grant Related to Asset

Recognition (A) Recognize as specific expense (A) Recognize as depreciable asset
1. grant received: a. Grant received:
dr. Cash [cost of grant received] dr. Cash [depreciable asset]
cr. Deferred grant income cr. Deferred grant income
2. allocation of grant received b. Acquisition of asset:
[expense ratio x grant received] : dr. Asset [cost of asset]
dr. Deferred grant income cr. Cash
cr. Grant income c. Depreciation of asset:
3. specific expense for the year: dr. Depreciation [cost/useful life]
dr. Expense cr. Accumulated depreciation
cr. Cash d. Allocation of grant:
dr. Deferred grant income
cr. Grant income [grant/useful life]
(B) Received as compensation for (B) Recognize as non-depreciable asset
expenses a. Grant received:
1. Immediate recognition as income : dr. Asset
dr. Cash cr. Deferred grant income
cr. Grant income [entries for acquisition, depreciation, and allocation
are the same as depreciable asset]
STUDY GUIDE INTERMEDIATE ACCOUNTING I FINAL PERIOD

Presentation Repayment
Recognized as income Presented under income statement: 1. Record for grant received:
a. Separately dr. Cash
b. Under “other income” cr. Deferred grant income
c. Deducted from related expense 2. Record for allocation of grant:
dr. Deferred grant income
cr. Grant income [grant/useful life]
3. Record for repayment:
dr. Deferred grant income
Loss on repayment of grant
[allocated amount]
cr. Cash [grant amount]
Recognized as asset (A) Deferred income approach (A) Deferred income approach
1. Record acquisition of asset: Year 1
dr. Asset 1. Record for acquisition of asset:
cr. Cash dr. Asset
2. Record grant as deferred income : cr. Cash
dr. Cash 2. Record for grant as deferred income :
cr. Deferred Income dr. Cash
3. Record annual depreciation: cr. Deferred grant income
dr. Depreciation 3. Record for allocation of asset:
cr. Accumulated depreciation dr. Depreciation [cost/useful life]
4. Recognize income from grant: cr. Accumulated depreciation
dr. Deferred grant income 4. Record for allocation of grant:
cr. Grant income [grant/useful life] dr. Deferred grant income
cr. Grant Income [grant/useful life]
Year 2
1. Record for allocated asset [same]
2. Record for allocated grant [same]
[Compute CA year-end] Year 3
Cost of asset 1. Record for repayment:
less: accum. dep. loss on repayment = lump sum of
[dep-current grant income
x useful life]
2. Record for allocated grant [same]
CA - end
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(B) Deduction from asset approach (B) Deduction from asset approach
[Computation for 1. Record acquisition of asset: Year 1
depreciation] dr. Asset 1. Record for acquisition of asset.
Acquisition cost cr. Cash 2. Record grant as deduction from
less: Grant 2. Record grant as deduction from cost of asset.
cost of asset: 3. Record for allocation of net (?)
Net cost dr. Cash value [asset – grant/useful life]:
less: residual value cr. Asset [deduction] dr. Depreciation
3. Record annual depreciation: cr. Accumulated depreciation
Depreciable amt. dr. Depreciation Year 2
divide: useful life [annual depreciation] 1. Record for allocation of net value
Annual depreciation cr. Accumulated depreciation [same]
Year 3
1. Record for repayment
[reverse entry]:
dr. Asset [grant amount received]
cr. Cash
2. Record for total depreciation:
Depreciation on original CA
add: depreciation on increase CA
{[grant/useful life] x # of years}
Total depreciation for year

Accounting for other grants

Grant of interest-free loan: loan in which entity must meet the terms for forgiveness of the loan; with NIL or
below-market rate of interest.

Amortization of interest-free loan

Amortization Present value x interest rate
Discount on note payable 1. Initial discount on note payable: Loan amount – initial PV
2. Subsequent discount on note payable: preceding balance –
amortization
Present value 1. Initial present value: loan amount x PV rate
2. Subsequent present value: preceding balance + amortization
STUDY GUIDE INTERMEDIATE ACCOUNTING I FINAL PERIOD

Chapter 25 Borrowing Costs

What are borrowing costs?
Borrowing costs: interests and other costs incurred connected to the borrowing of funds.

Included in borrowing costs:

a. Interest expense [compute using effective interest method].
b. Finance charge with respect to finance lease.
c. Exchange difference from foreign currency, considered as an adjustment to interest cost.

What are qualifying assets?

Qualifying asset: asset that takes a substantial period to prepare for intended use or sale.

Examples of qualifying assets:

a. Manufacturing plant
b. Power generation facility
c. Intangible asset
d. Investment property

Assets excluded from capitalization of borrowing costs:

a. Asset measured at fair value
b. Inventory manufacture in large quantities on a repetitive basis
c. Acquired asset ready for intended use/sale

Accounting for borrowing costs

Rules for borrowing costs:
1. Borrowing directly attributable to acquisition, construction, or production of qualifying asset
= capitalized as cost of asset [mandatory]
2. Other borrowing costs [not directly attributable]
= expensed as incurred

Two types of borrowing

1. Specific borrowing costs: funds borrowed specifically for the purpose of acquiring a qualifying asset.
2. General borrowing: funds are generally borrowed and used for acquiring a qualifying asset.

Accounting for specific borrowing costs

Actual borrowing costs xxx
less: investment interest from temporary investment (xxx)

Capitalizable borrowing cost xxx

STUDY GUIDE INTERMEDIATE ACCOUNTING I FINAL PERIOD

Table for average carrying amount of asset

Method 1: divide by total months per year at end amount

Month (a) Expenditures (b) Months outstanding (c) Amount [a x b]
month/date Expenditure for the month # of months from end date [expenditure x months outstanding]

Average carrying amount [total amount/12 (total months per year)]

Method 2: multiply by fraction [ratio of months outstanding to total per year]
Month (a) Expenditures (b) Fraction (c) Average [a x b]
month/date Expenditure for the month [# of months outstanding/total] [expenditure x fraction]

Initial measurement Subsequent measurement

General borrowing 1. Compute for total general 1. Compute for capitalization rate
borrowings [total annual borrowing costs/total general
[sum of principal amounts] borrowings]
2. Compute for total borrowing cost 2. Compute for capitalizable borrowing
a. % x principal = borrowing costs cost
b. Sum of borrowing costs [average carrying amount x capitalization
rate]
3. Compute for average carrying Capitalizable borrowing cost
amount [see table] < actual borrowing cost
Specific and general 1. Compute for total cost of 1. Compute for capitalizable borrowing
borrowing expenditures costs:
[sum of months’ expenditures] a. Average expenditure
2. Compute for average expenditures less: applicable to specific borrowing
[see table] Applicable to general borrowing
b. Specific borrowing
add: general borrowing
[applicable to SB]
Total capitalizable borrowing cost