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Copy of Property, Plant and Equipment

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Mae Angela Kong

on 8 February 2014

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Transcript of Copy of Property, Plant and Equipment

Property, Plant and Equipment
Definition
-are “
tangible assets
that are
held for use in production
or supply of goods or services, for rental to others, or for administrative purposes, and are expected to be used during
more than one period
”.
Recognition of property , plant and equipment
An item shall be recognized when:
a. It is probable that future economic benefits associated w/ the asset will flow to the entity.
b. The cost of the asset can be measured reliably.

Spare parts and servicing equipment
Most spare parts and servicing equipment are usually carried as inventory and recognized as an
expense
when consumed.
Measurement after recognition
After initial recognition, an entity shall choose either the
cost model
or the
revaluation model
as its accounting policy and shall apply that policy to an entire class of property, plant or equipment.
Examples of property, plant and equipment
• Land
• Building
• Machinery
• Ship
• Aircraft
• Motor vehicle
• Furniture and fixtures
• Office Equipment
• Patterns
• Tools
• Leasehold Improvement
• Book plates

old term -
fixed assets
PAS 16 on property, plant and equipment
does not
apply to:
a. Biological assets related to agricultural activity

b. Mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources

Measurement at recognition
Directly Attributable Costs
Costs not qualifying for recognition
However, major spare parts and stand by equipment qualify as property, plant and equipment when the entity expects to use them during more than one period.
An item of property, plant and equipment that qualifies for recognition as an asset shall be measured
at cost
.
Elements of Cost
a. Purchase price, including import duties and nonrefundable purchase taxes, after deducting trade discounts and rebates
b. Cost directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in a manner intended by management
c. 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.

a. Costs of employee benefits arising directly from the construction
or acquisition of the item of property, plant and equipment
b. Cost of site preparation
c. Initial delivery and handling cost
d. Installation and assembly cost
e. Professional fees
f. Costs of testing

Examples of costs that are expensed rather than recognized as element of cost 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 promotion
c. Costs of conducting business in a new location or w/ new class of customer, including costs of staff training
d. Administration and other general overhead costs
e. Costs incurred while an item capable of operating in the manner intended by management
has yet to be brought into use or is operated at less than full capacity
f. Initial oprating losses
g. Costs of relocating or reorganizing part or all of the entity’s operations

Acquisition of property
Cash basis

The cost of the asset acquired on a cash basis simply includes the
cash paid plus directly attributable costs
such as freight, installation cost and other cost necessary in bringing the asset to the location and condition for its intended use.

For example, a machinery is acquired at a cash price of ₱300,000. In addition to the cash payment,
the entity pays for the following costs in connection with the machinery: transportation, ₱20,000; installation cost, ₱10,000; and cost of trial runs, ₱5,000.
Machinery 335,000
Cash 335,000

For example, land and building are acquired at a single cost of ₱5,500,000. At the time of acquisition, the land has a fair value of ₱1,000,000
and the building, ₱4,000,000.
Fair Value Fraction Allocated Cost
Land 1,000,000 1/5 1,100,000
Building 4,000,000 4/5 4,400,000
6,000,000 5,500,000


The acquisition of the land and building is recorded as follows:
Land 1,100,000
Building 4,400,000
Cash 5,500,000

Acquisition on account
When the asset is acquired on account subject to cash discount, cost of the asset is equal to the
invoice price

minus the discount
,
regardless whether the discount is taken or not
.
Illustration
An equipment is purchased for P100,000, 2 / 10, n/30.The purchase may be recorded using either the gross method or net method.

Gross Method
1. To record the acquisition
Equipment 100,000
Accounts Payable 100,000


2. To record the payment
within
the discount period :

Accounts Payable 100,000
Cash 98,000
Equipment 2,000




3. To record the payment
beyond
the discount period:

Accounts Payable 100,000
Purchase discount lost 2,000
Cash 100,000
Equipment 2,000

Net Method

1. To record the acquisition

Equipment 98,000
Accounts Payable 98,000

2. To record the payment within the discount period

Accounts payable 98,000
Cash 98,000

3. To record the payment beyond the discount period:

Accounts payable 98,000
Purchase discount lost 2,000
Cash 100,000

Acquisition on Installment Basis
When payment for item of property, plant and
equipment is deferred beyond normal credit terms, its cost is the
cash price
equivalent.
For example, a machinery is purchased at an installment price of ₱350,000. The terms are ₱50,000 down and the balance payable in three equal annual installments. The cash price of the machinery is ₱290,000. A promissory note is issued for the installment balance of ₱300,000.
Journal Entries
1. To record the acquisition of the machinery
Machinery 200,000
Discount on note payable 60,000
Note Payable 300,000
Cash 50,000


2. To record the first installment payment
Note Payable 100,000
Cash 100,000

3. To amortize the discount on note payable
Interest Expense 30,000
Discount on note payable 30,000





Note Payable Fraction Interest Expense
1st Year 300,000 3/6 30,000
2nd Year 200,000 2/6 20,000
3rd Year 100,000 1/6 10,000
600,000 60,000


No available cash price
If an asset is acquired by installment and there is
no available cash price
, the asset is recorded at an amount equal to
present value
using the implied interest rate.
For example, a machinery is acquired at an installment price of ₱700,000. The terms are ₱100,000 down the balance payable in three equal annual installments.
A note is issued for the balance of ₱600,000. There is
no available cash price
for the machinery.

Using an implied interest rate of 10%, the present value of an ordinary annuity of 1 is 2.487 for three periods. In this case, the cost of the machinery is computed as follows:

Down payment 100,000
Present value of note payable (200,000 x 2.487) 497,400
Total Cost 597,400
Note Payable 600,000
Present value of note payable (497,400)
Implied interest 102,600




Journal Entries
1. To record the acquisition
Machinery 597,400
Discount on note payable 102,600
Cash 100,000
Note Payable 600,000

2. To record the first installment payment
Note payable 200,000
Cash 200,000

3. To amortize the discount on note payable
Interest expense 49,740
Discount on note payable 49,740

Year Payment Interest Principal Present Value
Jan 1 497,400
1st Year 200,000 49,740 150,260 347,140
2nd Year 200,000 34,714 165,286 181,854
3rd Year 200,000 18,146 181,854 -

Issuance of Share Capital
The ASC concluded that if shares are issued for consideration other than cash, the proceeds shall be measured by the fair value of the consideration received.

Accordingly, where a property is acquired through the issuance of share capital, the property shall be measured at an amount equal to the following in the order of priority:
a. Fair value of the property received
b. Fair value of the share capital
c. Par value or stated value of the share capital

Illustration
A piece of land is acquired by issuing 20,000 shares with par value of ₱50. At the time of acquisition, the fair value of the land is ₱1,600,000 and the share quoted at ₱90 per share.
Journal entry to record the acquisition
a. The fair value of the land is used
Land 1,600,000
Share Capital (20,000 x ₱50 ) 1,000,000
Share Premium 600,000

b. The fair value of the share capital used
Land ( 20,000 x 90 ) 1,800,000
Share Capital 1,000,000
Share Premium 800,000

c. The par value of the share capital is used
Land 1,000,000
Share Capital 1,000,000

Full transcript