Property, Plant and Equipment (ORIENTATION) > Machinery and Equipment

ACN001- Current Assets Standard: IAS 16

ACN002- Non Current Assets (Intangible Assets)
ACN003- Liabilities Scope
ACN004 - 4th year (1st Sem) > Agriculture: Biological Assets - Living animals or
Professional Electives - 4th year (2nd Sem) plants use in agriculture

➔ Orientation (Day 1) > Paragraph 3 (Not applicable)

(Measurements) 1. Agriculture (Animal or Plants)
2. PPE that are treatment as inventories (Sell)
Cash and Cash Equivalent (IFRS 5)
- At Face Value 3. Exploration with regard of Mining (IFRS 6)

Accounts Receivable IAS 16 PARAGRAPH 6

- At Face Value - Short term receivable. There’s no 1. Tangible Items
change at all ( Normally 30 days, 60 days and 90 *Accounts Receivable is not tangible so
days) Accounts Receivable is not part of PPE

Inventories *As far as tangibility concern cash can

- At Cost ( Kung magkano binili plus directly classified as PPE but according to the other
attributable cost) definition it is not used for more than 1 year
so it is not classified as PPE
Directly attributable cost - This is all the cost
where the goods are bring to our location such as 2. Expected to be used for more than 1
freight, taxes and others period
> Anything to help to bring the asset *One period as One year
> To operate the asset
3. Used in production of goods or services
Investments - Manufacturing
- At Fair Value - Office
> Debt Securities (Bonds) - Could be Loans
> Equity Securities (Stocks) - Ordinary Hanging Question:
Investment or An Associate - Is collector items can be classified as PPE?

Investment Property (Land and Building) ➔ Concept 1 (Day 2)

Standard: PAS 40 OR IAS 40 Cash
Purpose: ❏ Unrestricted in nature
> For Capital Appreciation (Increase of ❏ Used for operation and operation normally
Appreciation) last for a year so we don't recognize cash
> For Rental or Operating Lease as PPE.

*Opposite of Investment Property is Commemorative Items (Like coins and bills for
Property, Plant and Equipment display)
- Yes it is classified as PPE because it is
Property, Plant and Equipment used for display.
> Land 1. It is not used for operation so it is not as
> Transportation (Cars, Vans, and More) Cash .
> Building
 2. To be used for more than 1 year (Palamuti) Cash Price Equivalent - when you buy it through
this is for economic entities ( Part of cash like for example in cell phone you can pay it
ambiance, paintings and statute) - It is as installment price and cash price.
classified as Furnitures and Fixtures.
If ever cash price is not available (Rare Item)
Measurement of PPE ● Present Value of the Note plus the Down
- At cost (acquisition price) plus Directly Payment.
attributable cost. (Cash Basis) Present Value as principal

Directly Attributable Cost ❖ Bonds (Long term obligations)

❏ Installation cost Evidence: Certificate of Indebtedness
❏ Freight In
Hierarchy of PPE Measurement:
Financing Arrangements ● Measure of Fair Value of the Bonds
● Measure of Fair Value of PPE
❖ On Account (Credit Terms) ● Measure of Face Value of the Bonds
Evidence: Sales Invoice issued by the Seller
❖ Shares (Part Owner)
Credit terms: 2/10, n/30 Evidence: Certificate of Ownership
- Contains a discount period and number of If you don’t want to have credits you can acquire
days to be paid PPE by selling shares to the seller and he/ she can
be part owner in your corporation.
PPE Measurement :
Measure as Purchase discount is deducted Hierarchy of PPE Measurement:
whether the discount is taken or not because we ● Measure of Fair Value of PPE
need to reflect the true value of the PPE. ● Measure of Fair Value of the Shares
● Measure of Face Value of the Shares
Use: Net Method
➔ Concept 2 ( Day 3)
❖ Promissory Note ❖ Exchange
Evidence: Note 1. Ordinary - Trade In - You don't make any
transactio tto dealer or seller. It is somebody
1. Interest Bearing Note - Produces a that you want to exchange something with.
payment or collection of interest separate
from principal. Stated the percent of Hierarchy of PPE Measurement:
interest. ● Measure of Fair Value of Asset Given plus
cash paid
PPE Measurement: ● Measure of Fair Value of Asset Received
● Measure as Face Value because it is plus cash paid.
represented as principal. ● For Lacks Commercial Substance - Same
model no uniqueness or some significance.
2. Non Interest Bearing Note - There’s no (Identical) so the measurement is Carrying
stated percent of interest but it is assumed Amount Given plus Cash Paid.
upon payment or collection nandon na yung
interest . (When the problem is silent there is commercial
substance)
PPE Measurement:
● Measures as Cash Price Equivalent 2. Commercial - It is a transaction between
the company and the seller or dealer.
 2. Any excess above par value is charge to Share
Hierarchy of PPE Measurement: Premium or in the Philippines it is called as APIC
● Measure of Fair Value of Asset Given plus (Additional Paid in excess of Par Value)
Cash paid
● Measure of Trade in Value plus Cash Fair Value of the Shares: P120 per share
paid- both seller and buyer agree to the
value. ❏ Journal Entry:
Land P6,000,000
Counteroffer- Offer of buyer and offer of seller. Ordinary Share Capital P5,000,000
Consent- if both are agreed. Share Premium 1,000,000
Trade in is not a priority of faithful representation.
❏ Computational:
❖ Donation Land Computation:
PPE Measurement: Ordinary Shares P50,000
● Measure at Fair Value Market Price 120
Total Fair Value of Land P6,000,000
* The credit side of the journal entry depends on
the identity of the donor. Ordinary Share Capital Computation:
❏ If the donor is a shareholder it will be Ordinary Shares P50,000
credited as donated capital. The donated Par Value 100
capital is a seperate equity account. Total Share Capital P5,000,000
❏ If the donor is a philanthropist/good
samaritan it will be credited or recognized Share Premium Computation:
as income. (Miscellaneous Income or any Fair Value of Land P6,000,000
other income.) Less: Total Share Capital (5,000,000)
❏ If the donation is from the government - It Total Share Premium P1,000,000
is not totally libre. You have received
something from the government hoping that Scenario 2 (Donation by shareholder)
you will do something in exchange or PPE Measurement:
condition. It is like political will. It will be ● Measure at Fair Value
recognized as a government grant.
The standard of this is IAS 20. Note: Since it is donated by the shareholder the
credited account is donated capital.
Answer to Problem 25 - 1
Scenario 1 (Shares Transaction) ❏ Journal Entry:
Hierarchy of PPE Measurement: Land P1,000,000
● Measure of Fair Value of PPE Donated Capital P1,000,000
● Measure of Fair Value of the Shares
● Measure of Face Value of the Shares Note: If the account used is donated capital any
expenses will be in the donated capital else it will
Note: Assessed Value is not considered as a fair be charged as expense.
value of PPE and it is used to determine the
property taxes computations so in that case the fair Donated Capital P50,000
value of the shares is used. Cash P50,000

Rule:
1. Share capital account is always measured at
par value.
 ➔ Case 1 and Case 2 ( Day 4) Scenario 4 (Bundled Transaction w/ Liability)

Case 1 (Continue) Computation:

Scenario 3 (Bundled Transaction) Cash paid for the Asset P7,500,000
Mortgage Payable 2,500,000
Computation: Total Value of PPE P10,000,000
Acquisition Price: P5,400,000
Appraiser Fee: 100,000 Note: The mortgage payable is capitalized to the
Total Value of PPE P5,500,000 cash you paid in the asset.

Note: Capitalized- add the cost in the value of the Ways of Bundled Transaction:
asset and Appraiser fee is an example of directly - Use relative fair value method or relative
attributable cost. sales price method
- Land is not depreciated but buildings can be
depreciated. Land doesn't have a definite life in fact Note: There’s no fair value. The assess value is not
since the time was created andyan na ang lupa. considered because it is only for the computation
Land can only be IMPAIRED. for taxes obligation. So assumed the ratio not the
-Impairment is the decreased value of the land. value itself.

Ways of Bundled Transaction: Computation for Pro Rata:

- Use relative fair value method or relative -Since the ratio of the building is 60% the
sales price method proportion of land is:
Pro Rata
Computation for Fair Value: Land 40%
Fair Value (Appraise Value) Building 60%
Land P 2,000,000 100%
Building 3,000,000
P5,000,000 Computation for Allocated Price:
Total Fair Value of PPE : P10,000,000
Computation for Pro Rata:
Pro Rata Allocated Price
Land (P2,000,000/5,000,000) 40% Land (40% x 10,000,000) P4,000,000
Building (P3,000,000/5,000,000) 60% Building (60% x 10,000,000) 6,000,000
100% 10,000,000

Computation for Allocated Price: ❏ Journal Entry:

Total Fair Value of PPE : P5,500,000 Land P4,000,000
Building 6,000,000
Allocated Price Cash P7,500,000
Land (40% x 5,500,000) P2,200,000 Mortgage Payable 2,500,000
Building (60% x 5,500,000) 3,300,000
5,500,000 Answer to Problem 25-2 (Non Interest Bearing
Note)
❏ Journal Entry:
Building P3,300,000 PPE Measurement:
Land 2,200,000 ● Measures as Cash Price Equivalent
Cash in Bank P5,500,000 If ever cash price is not available (Rare Item)
● Present Value of the Note plus the Down
Payment.
 December 31, 2019
Computation:
Notes Payable P100,000
Downpayment P200,000
Cash in Bank P100,000
Installment Payment for 5 years 500,000
(100,000 x 5 years)
Method: Straight Line
Total Payment for Installment P700,000
Interest P120,000
Less Cash Price 580,000
Installment date / 5 years
Interest P120,000
Every Year 24,000

Note: The installment payment is exceeded to the Interest Expense P24,000

cash price. Discount on Note Payable P24,000

Amortization of Price: Effective Interest Method Note: Since there’s no effective interest rate we will
To spread out the interest you need to use an use a straight line method to spread out the
effective interest method. interest.

3 ways of Spreading Interest Journal Entry:

1. Effective Interest Method - prescribed of the December 31,2020
standard Notes Payable P100,000
2. Straight Line Cash in Bank P100,000
3. Bond Outstanding
Interest Expense P24,000
Note: Since there’s no effective interest rate we will Discount on Note Payable P24,000
use a straight line method to spread out the
interest. Answer to Problem 25-2 (Non Interest Bearing
Note)
❏ Journal Entry
If ever cash price is not available (Rare Item)
-To record the acquisition: ● Present Value of the Note plus the Down
January 1 , 2019 Payment.

Equipment P580,000 Note: There's no cash price equivalent so in that

Discount on notes payable 120,000 case you will use present value.
Cash in Bank P200,000
Notes Payable 500,000 When will we use annuity?
- We use annuity if it is installment while we
Note: Discount on notes payable is kind of use the pv of 1 if it is lump sum so in that
prepayments. scenario we will use annuity.
Other Computation for Cash Equivalent Price
Downpayment P200,000 Computation of PV of Note:
Present Value of Note 380,000 Annual Payment P200,000
P580,000 Annuity x 3.170
PV of Note P634,000
Face Value of the Note P 500,000
Less: Present Value of the Note (380,000) Computation of Cash Equivalent Price:
Interest P120,000 Downpayment P100,000
PV of Note 634,000
Cash Price Equivalent P734,000
-To settled the obligation
Face Value (200,000 x 4 years) P800,000
Less: PV of Note (634,000) Answer to Problem 25-4
Interest P166,000 Scenario 1 (Cash Discount)

➔ Case 3 and Case 4 (Day 5) PPE Measurement :

Measure as Purchase discount is deducted
❏ Journal Entry: whether the discount is taken or not because we
-To record the acquisition: need to reflect the true value of the PPE.
January 1 , 2019
Computational:
Machinery P734,000
Net Method
Discount on note payable 166,000
Acquisition Price P3,000,000
Cash P100,000
Discount x 10%
Note Payable 800,000
Purchase Discount P 300,000
Less: Acquisition Price (3,000,000)
-To record the first installment payment:
Total Value of PPE P2,700,000
December 31, 2019
Directly Attributable Cost 50,000
Notes Payable P200,000
P2,750,000
Cash P200,000

-To amortize the discount on notes payable: Note: We incurred additional P50,000 to remove
December 31, 2019 the old machine so it is directly attributable to
Interest Expense P63,400 cost. Machine supplies are not included in
Discount on Notes Payable P63,400 directly attributable cost because it is located
for the new asset or another account .
Effective Interest Method Table
❏ Journal Entry:
Date Payment Interest Principal Present
(10%) Value -To record the acquisition:
Machinery P2,750,000
Jan 1. P634,000
Purchase Discount Lost 300,000
Dec 2019 P200,000 P63,400 P136,600 P497,400 Cash P50,000
Accounts Payable 3,000,000
Dec 2020 P200,000 P49,740 P150,260 P347,140

Dec 2021 P200,000 P34,714 P165,286 P181,854 Note: In accounting in PPE we used the net
method. Purchase Discount Lost is classified as
Dec 2022 P200,000 P18,146 P181,854 0
Operating expense and it is not part of the
Note: Balancing Figure is used because interest is purchases.
round off.
-To record the supplies for new machine
Next Year 2020 Factory Supplies P150,000
❏ Journal Entry: Cash P150,000
-To record the second installment payment:
December 31, 2020 Note: Assume the machine supplies are used in
Notes Payable P200,000 manufacturing.
Cash P200,000
Scenario 2 (Non Interest Bearing Note Cash)
-To amortize the discount on notes payable:
December 31, 2020 PPE Measurement:
Interest Expense P49,740 ● Measures as Cash Price Equivalent
Discount on Notes Payable P49,740 If ever cash price is not available (Rare Item)
 ● Present Value of the Note plus the Down
Payment.
Computation of Cash Equivalent Price:
Computation: Downpayment P 0
Downpayment P 500,000 PV of Note 1.585.000
Installment Payment for 4 years 5,000,000 Cash Price Equivalent P1,585,000
(1,250,000 x 4 years) .
Total Payment for Installment P5,500,000 Face Value (P500,000 x 4 years) P2,000,000
Less Cash Price (4,700,000) Less: PV of Note (1,585,000)
Interest P800,000 Interest P 415,000

❏ Journal Entry ❏ Journal Entry

-To record the acquisition: -To record the acquisition:
Machinery P4,700,000 Machinery P1,585,000
Discount on notes payable 800,000 Discount on notes payable 415,000
Cash in Bank P500,000 Notes Payable P2,000,000
Notes Payable 5,000,000
-To record the first installment payment:
Scenario 3 (Non Interest Bearing Note PV) December 31, 2019
Notes Payable P500,000
PPE Measurement: Cash P500,000
● Measures as Cash Price Equivalent
If ever cash price is not available (Rare Item) -To amortize the discount on notes payable:
● Present Value of the Note plus the Down December 31, 2019
Payment. Interest Expense P158,500
Discount on Notes Payable P158,500
Computation of PV of Note:
Annual Payment P500,000
Effective Interest Method Table
Annuity x 3.17
PV of Note P1,585,000 Date Payment Interest Principal Present
(10%) Value

Jan 1. P1,585,000
Note: If there is a present value of an annuity of 1
IN ADVANCE you will only use it if you will pay the Dec 2019 P500,000 P158,500 P341,500 P1,243,500
first installment payment at the time you
Dec 2020 P500,000 P124,350 P375,650 P867,850
purchased the equipment while you will use the
present value of an annuity of 1 if you will pay Dec 2021 P500,000 P86,785 P413,215 P454,635
another date.
Dec 2022 P500,000 P45,365 P454,635 0

In computation for In advance you will less 1 year

Scenario 4 (Non Interest Bearing Note PV)
Installment Years 4
Less: a year 1
PPE Measurement:
Number of Years 3
● Measures as Cash Price Equivalent
Rate: 10%
If ever cash price is not available (Rare Item)
Computation of PV
−𝑛
● Present Value of the Note plus the Down
Formula: 1 − (1 + 𝑟) / 𝑟 Payment.
−3
= 1 − (1 +. 10) / . 10
=2.49 Note : After you compute add 1 so the Note: The payment is lump sum.
answer is 3.49
 Computation of PV of Note: Computation for Pro Rata:
Annual Payment P2,000,000 Pro Rata
Annuity x 0.68 Land (P1,000,000/4,000,000) 25%
PV of Note P1,360,000 Building (P3,000,000/4,000,000) 75%
100%

Computation of Cash Equivalent Price:

Downpayment P 0 Computation for Allocated Price:
PV of Note 1.360.000 Total Fair Value of PPE : P6,000,000
Cash Price Equivalent P1,360,000
Allocated Price
Face Value P2,000,000 Land (25% x 6,000,000) P1,500,000
Less: PV of Note (1,360,000) Building (75% x 6,000,000) 4,500,000
Interest P 640,000 6,000,000

❏ Journal Entry ❏ Journal Entry:

-To record the acquisition: Building P4,500,000
Machinery P1,360,000 Land 1,500,000
Discount on notes payable 640,000 Cash in Bank P6,000,000
Notes Payable P2,000,000
Acquisition Price for Machinery and Equipment:
-To amortize the discount on notes payable: Acquisition Price: P 1,800,000
December 31, 2019
Computation for Fair Value:
Interest Expense P136,000
Fair Value (Appraise Value)
Discount on Notes Payable P136,000
Machinery P 800,000
Equipment 400,000
Computation for Interest Expense: P1,200,000
PV of Note P1,360,000
Interest Rate x 10% Note: We have to seperate the Machinery and Office
Total Interest Expense P 136,000 Equipment not because the one is not depreciable but
because maybe both have different methods when it
Answer to Problem 25-5 comes to depreciable like double decline or straight line
method.
Scenario 1 (Bundled Transaction)
Computation for Pro Rata:
Ways of Bundled Transaction: Pro Rata
- Use relative fair value method or relative Machinery (P800,000/1,200,000) 2/3
sales price method Equipment (P400,000/1,200,000) 1/3
3/3
Acquisition Price for Land and Building:
Acquisition Price: P 6,000,000
Computation for Allocated Price:
Computation for Fair Value: Total Fair Value of PPE : P1,800,000
Fair Value (Appraise Value)
Land P 1,000,000 Allocated Price
Building 3,000,000 Machinery (2/3 x 1,800,000) P1,200,000
P4,000,000 Equipment (1/3 x 1,800,000) 600,000
Note: We have to seperate the land and building P1,800,000
because land is not depreciable.
 Computation of Share Capital:
❏ Journal Entry:
Number of Shares 60,000
Machinery P1,200,000
Par Value x 100
Office Equipment 600,000
Total Share Capital P6,000,000
Cash in Bank P1,800,000
Acquisition Price
Delivery Equipment: P500,000 Computation of Share Premium:
Total Fair Value of PPE P8,000,000
Note: We used the cash purchase/ acquisition Less: Total Share Capital 6,000,000
price of delivery equipment and not the fair value Total Share Premium P2,000,000
because when cash basis we simply measure the
cost of an item plus directly attributable cost and
since we don’t have any directly attributable cost Note:
incurred we used only the acquisition price. 1. Share capital account is always measured at
par value.
❏ Journal Entry: 2. Any excess above par value is charge to Share
Delivery Equipment P500,000 Premium or in the Philippines it is called as APIC
Cash in Bank P500,000 (Additional Paid in excess of Par Value)

Scenario 2 (Shares Transaction) Note: In the absence of share identity used share
capital because it is generic.
Hierarchy of PPE Measurement:
● Measure of Fair Value of PPE Scenario 3 (Donation by Philanthropist)
● Measure of Fair Value of the Shares
● Measure of Face Value of the Shares PPE Measurement:
● Measure at Fair Value
Data:
Fair Value of PPE: Note: Since it is donated by the philanthropist the
Land P1,000,000 credited account is Income or Miscellaneous
Building 5,000,000 Income.
Machinery 2,000,000
❏ Journal Entry:
Fair Value of Shares: Land P1,500,000
Shares 60,000 Miscellaneous Income P1,500,000
Quoted Price x 150
Fair Value of Shares P9,000,000 Scenario 4 (Cash Discount)
PPE Measurement :
Note: Since we have the fair value of PPE we used Measure as Purchase discount is deducted
it as a measurement of the PPE. whether the discount is taken or not because we
need to reflect the true value of the PPE.
❏ Journal Entry: Computational:
Land P1,000,000 Net Method
Building 5,000,000 Acquisition Price P900,000
Machinery 2,000,000 Discount x 2%
Share Capital P6,000,000 Purchase Discount P 18,000
Share Premium 2,000,000 Less: Acquisition Price (900,000)
Total Value of PPE P882,000
Directly Attributable Cost 35,000
P917,000
 Answer to Problem 25-6 (Exchange)
❏ Journal Entry: Scenario 1 (Ordinary Exchange Gain)
-To record the acquisition:
Machinery P882,000 Hierarchy of PPE Measurement:
Freight In 35,000 ● Measure of Fair Value of Asset Given plus
Cash P917,000 cash paid
● Measure of Fair Value of Asset Received
Note: The term to indicate the process it is called plus cash paid.
as capitalized and directly attributable cost is the ● For Lacks Commercial Substance - Same
term. If we pay it in cash we can possibly lessen model no uniqueness or some significance.
the payment due to the discount because the seller (Identical) so the measurement is Carrying
wants to attract the customer to buy it at a lower Amount Given plus Cash Paid.
cost.
(When the problem is silent there is commercial
Scenario 4 (Non Interest Bearing Note PV) substance)

PPE Measurement: Explanation: The asset of Cherish is the car in

● Measures as Cash Price Equivalent exchange for the computer. The measurement of
If ever cash price is not available (Rare Item) the computer is the Fair Value of itself. We can’t
● Present Value of the Note plus the Down consider the listed selling price of the car as a fair
Payment. value because the Cherish company didn’t consider
the car as a PPE but rather an inventory and also it
Note: The payment is lump sum. is not an agreed value by both seller and buyer but
rather it is only an offer price.
Computation of PV of Note:
Annual Payment P400,000 Value of the Computer received by Cherish
Annuity x 0.797 Company Computation:
PV of Note P318,800 Fair Value of the asset Received P430,000
Add: Cash payment 50,000
Total Value of the Asset P480,000
Computation of Cash Equivalent Price:
Downpayment P 0 Gain or Loss Exchange Computation:
PV of Note 318,800 Value of the Asset Received P430,000
Cash Price Equivalent P318,800 Less: Carrying Amount (300,000)
Gain on exchange P130,000
Face Value P400,000
Less: PV of Note (318,800)
Note: The one we used in value of the asset
Interest P 81,200
received is the fair value of asset received because
there’s no FV of the asset given. If the value of the
❏ Journal Entry asset received is higher than the carrying
-To record the acquisition: amount of asset given then there is a GAIN ON
Machinery P318,800 EXCHANGE. Likewise, if the value of the asset
Discount on notes payable 81,200 received is lower than the carrying amount of
Notes Payable P400,000 asset given then there is a LOSS ON
EXCHANGE.
Note: Pv of 1 is for Lump Sum and Pv of annuity is
for installment.
 ❏ Journal Entry Note: The one we used in value of the asset
-To record the gain on exchange: received is the fair value of asset given since it is
Office Equipment P480,000 the first in hierarchy. If the value of the asset
Transportation Equipment P300,000 received is higher than the carrying amount of
Cash 50,000 asset given then there is a GAIN ON
Gain on Exchange 130,000 EXCHANGE. Likewise, if the value of the asset
received is lower than the carrying amount of
Note: Unless the exchange lacks commercial asset given then there is a LOSS ON
substance gain or loss will be recognized. EXCHANGE.

Scenario 2 (Ordinary Exchange Loss) ❏ Journal Entry

-To record the loss on exchange:
Hierarchy of PPE Measurement: Packaging Machine - New P140,000
● Measure of Fair Value of Asset Given plus Accumulated Depreciation 120,000
cash paid Loss on Exchange 10,000
● Measure of Fair Value of Asset Received Packaging Machine- Old P240,000
plus cash paid. Cash 30,000
● For Lacks Commercial Substance - Same
model no uniqueness or some significance. Note: Unless the exchange lacks commercial
(Identical) so the measurement is Carrying substance gain or loss will be recognized.
Amount Given plus Cash Paid.
Scenario 3 (Ordinary Exchange Non Monetary)
(When the problem is silent there is commercial
substance) Hierarchy of PPE Measurement:
● Measure of Fair Value of Asset Given plus
Cherish Company- Old Packaging Machine for New cash paid
Packaging Machine ● Measure of Fair Value of Asset Received
plus cash paid.
● For Lacks Commercial Substance - Same
Value of the New Packaging Machine received
model no uniqueness or some significance.
by Cherish Company Computation:
(Identical) so the measurement is Carrying
Fair Value of the Asset Given P110,000
Amount Given plus Cash Paid.
Add: Cash payment 30,000
Total Value of the Asset P140,000
(When the problem is silent there is commercial
substance)
Carrying amount Computation:
Cost of Old Machine P240,000
Note: Non monetary is we didn’t release any cash
Less: Accumulated Depreciation 120,000
payment for the asset.
Carrying Amount - Old P120,000
Value of the Equipment received by Cherish
Note: The accumulated depreciation is 240,000 Company Computation:
multiplied by the 50% rate of depreciation. Fair Value of the Asset Given P1,000,000
Add: Cash payment 0
Gain or Loss Exchange Computation: Total Value of the Asset P1,000,000
Value of the Asset Given P110,000
Less: Carrying Amount 120,000
Loss on exchange (P10,000)
 POV of Smile Company
Carrying amount Computation:
Cost of Old Machine P3,000,000 Value of the Equipment received by Smile
Less: Accumulated Depreciation 1,800,000 Company Computation:
Carrying Amount - Old P1,200,000 Fair Value of the Asset Given-Smile P500,000
Add: Cash payment 0
Gain or Loss Exchange Computation: Total Value of the Asset P500,000
Value of the Asset Given P1,000,000
Less: Carrying Amount 1,200,000 Carrying amount Computation:
Loss on exchange (P200,000) Cost of Old Equipment P2,400,000
Less: Accumulated Depreciation 2,000,000
Carrying Amount - Old Smile P 400,000
Note: The one we used in value of the asset
received is the fair value of asset given since it is
Gain or Loss Exchange Computation:
the first in hierarchy. If the value of the asset
Value of the Asset Given P500,000
received is higher than the carrying amount of
Less: Carrying Amount 400,000
asset given then there is a GAIN ON
Gain on exchange P100,000
EXCHANGE. Likewise, if the value of the asset
received is lower than the carrying amount of
asset given then there is a LOSS ON ❏ Journal Entry
EXCHANGE. -To record the Gain on exchange:
Equipment- New P 500,000
❏ Journal Entry Accumulated Depreciation 2,000,000
-To record the loss on exchange: Equipment- Old P2,400,000
Equipment - New P1,000,000 Gain on Exchange 100,000
Accumulated Depreciation 1,800,000
Loss on Exchange 200,000 Note: Unless the exchange lacks commercial
Equipment - Old P3,000,000 substance gain or loss will be recognized.

Note: Unless the exchange lacks commercial POV of Frown Company

substance gain or loss will be recognized.
Value of the Equipment received by Frown
Company Computation:
Answer to Problem 25-7 (Ordinary Exchange
FV of the Asset Received-Frown P500,000
between two companies Non monetary)
Add: Cash payment 0
Total Value of the Asset P500,000
Hierarchy of PPE Measurement:
● Measure of Fair Value of Asset Given plus
Carrying amount Computation:
cash paid -SMILE
Cost of Old Equipment P2,200,000
● Measure of Fair Value of Asset Received
Less: Accumulated Depreciation 1,750,000
plus cash paid. -FROWN
Carrying Amount - Old Frown P 450,000
● For Lacks Commercial Substance - Same
model no uniqueness or some significance.
Gain or Loss Exchange Computation:
(Identical) so the measurement is Carrying
Value of the Asset Given P500,000
Amount Given plus Cash Paid.
Less: Carrying Amount 450,000
Gain on exchange P 50,000
(When the problem is silent there is commercial
substance)
Note: This is also the reason why these two
companies are non monetary because both are the
same value when it comes to their Fair Value.
 ❏ Journal Entry
Gain or Loss Exchange Computation:
-To record the Gain on exchange:
Value of the Asset Given P 420,000
Equipment- New P 500,000
Less: Carrying Amount 400,000
Accumulated Depreciation 1,750,000
Gain on exchange P 20,000
Equipment- Old P2,200,000
Gain on Exchange 50,000
❏ Journal Entry
Note: Unless the exchange lacks commercial -To record the Gain on exchange:
substance gain or loss will be recognized. Equipment- New 1,400,000
Accumulated Depreciation 600,000
Answer to Problem 25-8 (Commercial Equipment- Old P1,000,000
Exchange) Cash 980,000
Gain on exchange 20,000
Hierarchy of PPE Measurement:
● Measure of Fair Value of Asset Given plus
Cash paid
● Measure of Trade in Value plus Cash
paid- both seller and buyer agree to the
value.

Counteroffer- Offer of buyer and offer of seller.

Consent- if both are agreed.
Trade in is not a priority of faithful representation.

Note : The list price is not considered as a trade in

value because it is a subject to adjustment of both
parties. So we are going to use Cash Price
without trade in meaning to use this is the amount
that the seller is willing to offer to the buyer if they
paid it in cash.

In the absence of Fair Value Computation:

Cash Price Equivalent P 1,400,000
Less: Cash Payment with Trade 980,000
Trade In value P 420,000

Value of the Equipment received by Frown

Company Computation:
Trade In Value of Asset Given P420,000
Add: Cash payment 980,000
Total Value of the Asset P1,400,000

Carrying amount Computation:

Cost of Old Equipment P1,000,000
Less: Accumulated Depreciation 600,000
Carrying Amount - Old P 400,000
 cost) that is also the time we will recognize it as
GOVERNMENT GRANT income.

Standard: PAS 20 Paragraph 3

Expense Pro Income
- It is the assistance of the government in the Rata
transfer of resources to an entity in return
for part or future compliance with certain Year 1 2,000,000 10% 3,000,000
conditions relating to the operating activities
Year 2 4,000,000 20% 6,000,000
of the entity. (Subsidy , Subvention or
Premium) Year 3 6,000,000 30% 9,000,000

Government Assistance Year 4 8,000,000 40% 12,000,000

- It is the action by the government. It has no
Total: P20,000,000 P30,000,000
value.

Measurement : PAS 20 Paragraph 7 Computation For Pro Rata (Year 1):

- Measure at Fair Value Expense 2,000,000
Divide: Total expense / 20,000,000
Answer to Problem 26-1 (Government Grant) Pro rata 0.10 or 10%
Scenario 1 (Donation affiliated to expense )
Liability Method
Computation for Income (Year 1 )
Note: As long as the donation comes from the Total Income (Deferred Income) P30,000,000
political subdivision whether it is local government, Multiply: Pro rata x 10%
national government or from the government of the Income from Government Grant P3,000,000
other countries the point is those donations come
from the government.
❏ Journal Entry (Year 1):
- To record expense incurred :
It will not be recognized right away as income of the
Safety and environmental expense P2,000,000
government grant. We need to use the matching
Cash P2,000,000
of expense with revenue (Accounting Principle)

- To record the income to be recognized

At the time of the receipt of Donation
based on deferred income
❏ Journal Entry:
Deferred Income Government Grant P3,000,000
Cash P30,000,000
Income from Government Grant P3,000,000
Deferred Income from Government Grant/
Unearned Income P30,000,000
Scenario 2 ( Donation affiliated to an
depreciable asset) Liability Method
Note: We will first recognize it as liability because
Note: Construction of a laboratory and research
We use the liability method of recognizing income.
facility (building). The Government helps the entity
You first recognized it as liability because you have
for the construction of a building so it is affiliated in
not yet fulfilled the obligation/ condition set by the
an asset.
government upon completion of the task or needed
compliance then that is the time you will recognize
At the time of the receipt of Donation
it as income it is virtue as accrual .
❏ Journal Entry:
Cash P40,000,000
Accrual is when we recognize income when it is
Deferred Income from Government Grant/
earned. In the case of number 1 if we already
Unearned Income P40,000,000
incurred the expense (Safety and environmental
During the construction of a facility the
Computation For Income Recognition:
proforma entry will be this:
Straight Line Method
❏ Journal Entry:
Construction in Progress P50,000,000
Note: Residual Value you don’t consider it in
Cash P50,000,000
income recognition because it is affiliated to the
asset
Upon of completion of a facility the
construction in progress is a temporary
Annual Income Recognition = P40,000,000
account:
20
❏ Journal Entry:
Annual Income Recognition = P2,000,000
Building P50,000,000
Construction in Progress P50,000,000
❏ Journal Entry:
Note: The principle that we will use is also the - To record income recognition:
same that we used in scenario 1 which is a Deferred Income Government Grant P2,000,000
matching principle but in this case we will not use Income from Government Grant P2,000,000
the pro rata but rather we will use the method on
how the depreciation is used because this is Note: Every year this is the amount of your income
donation affiliated by the asset . In the case of the because it is a straight line method.
depreciable asset the income recognition is
based on the depreciation method used in the Scenario 3 ( Donation affiliated to
affiliated asset. In the absence of any method then non-depreciable asset to asset) Liability Method
we will use a straight line method.
Note: Land is not a depreciable asset when the
Cost = Cost - Salvage Value ( Residual Value) entity received a property it is recognized as Fair
Estimated Useful Life Value. Case 1 and 2 we received cash and
according to PAS 7 then it is recognized as face
Note: The difference between the cost and salvage value. Fair value is the value known by the buyer
value is called the depreciable cost. and the seller in an arm's length transaction. It is
transparent in both parties and it is objective in
nature. We need a professional to assess the value
Computation for Depreciation Expense:
to know the FV.
Straight Line Method
At the time of the receipt of Donation
Depreciable Expense = 50,000,000 - 0
❏ Journal Entry:
20
Land P50,000,000
Depreciation Expense = 50,000,000
Deferred Income from Government Grant/
20
Unearned Income P50,000,000
Annual Depreciation Expense = 2,500,000
Note: Income recognition especially for non
❏ Journal Entry: depreciable assets look for the compliance of the
- To record depreciation cost: entity. In this case the compliance is to build a
Depreciation Expense P2,500,000 factory. If the non depreciable asset is affiliated to
Accumulated Depreciation P2,500,000 compliance of the entity through a depreciable
asset then the income recognition will be based on
the depreciation method of the depreciable asset.
During the construction of a factory the ❏ Journal Entry:
proforma entry will be this: - To record income recognition:
❏ Journal Entry: Deferred Income Government Grant P2,000,000
Construction in Progress P80,000,000 Income from Government Grant P2,000,000
Cash P80,000,000
Note: Every year this is the amount of your income
Upon of completion of a factory the because it is a straight line method.
construction in progress is a temporary
account: Scenario 4 ( Donation affiliated to compensate
❏ Journal Entry: fortuitous event) Liability Method
Building P80,000,000
Construction in Progress P80,000,000 Note: The donation is to compensate the losses for
a fortuitous event then the donation recognized
Straight Line Method Formula: income right away.

Cost = Cost - Salvage Value ( Residual Value) At the time of donation we don’t have liability
Estimated Useful Life method:
❏ Journal Entry:
Note: The difference between the cost and salvage
value is called the depreciable cost. Cash P10,000,000
Income from Government Grant P10,000,000
Computation for Depreciation Expense:
Answer to Problem 26-2 (Donation affiliated to
Straight Line Method
non depreciable asset to expense)
Depreciable Expense = 80,000,000 - 0
Note: Income recognition especially for non
25
depreciable assets look for the compliance of the
Depreciation Expense = 80,000,000
entity. In this case the compliance is to build a
25
factory. If the non depreciable asset is affiliated to
Annual Depreciation Expense = 3,200,000
compliance of the entity through an expense then
the income recognition will be based on the
❏ Journal Entry: expense.
- To record depreciation cost:
Depreciation Expense P3,200,000 At the time of the receipt of Donation
Accumulated Depreciation P3,200,000 ❏ Journal Entry:
Land P12,000,000
Deferred Income from Government Grant/
Computation For Income Recognition: Unearned Income P12,000,000
Straight Line Method
Year Expense Pro rata Income
Note: Residual Value you don’t consider it in
income recognition because it is affiliated to the 2019 2,000,000 20% 2,400,000
asset
2020 2,000,000 20% 2,400,000

Annual Income Recognition = P50,000,000 2021 6,000,000 60% 7,200,000

25
Annual Income Recognition = P2,000,000 Total 10,000,000 100% 12,000,000
 depreciation method. When the problem is silent
the depreciation is straight line.
Computation For Pro Rata (Year 2019):
Expense 2,000,000
During the year:
Divide: Total expense / 10,000,000
❏ Journal Entry (Year 2019):
Pro rata 0.20 or 20%
- To record the building
Building P9,000,000
Computation for Income (Year 1 ) Cash P9,000,000
Total Income (Deferred Income) P12,000,000
Multiply: Pro rata x 20% - To record the tuition:
Income from Government Grant P2,400,000 Operating expense P600,000
Cash P600,000

❏ Journal Entry (Year 2019):

- To record expense incurred : Computation for Depreciation Expense:
Operating expense P2,000,000 Straight Line Method
Cash P2,000,000
Depreciable Expense = 9,000,000 - 0
- To record the income to be recognized 10
based on deferred income Depreciation Expense = 9,000,000
Deferred Income Government Grant P2,400,000 10
Income from Government Grant P2,400,000 Annual Depreciation Expense = P900,000

Answer to Problem 26-3 (Donation affiliated to ❏ Journal Entry:

non depreciable asset to expense) - To record depreciation cost:
Depreciation Expense P900,000
Condition from the government: Accumulated Depreciation P900,000
Consolidated Grant : ¾ for Building and ¼ for
subsidies to tuition
Computation For Income Recognition:
Straight Line Method
At the time of the receipt of Donation
❏ Journal Entry:
Note: Residual Value you don’t consider it in
Cash P12,000,000
income recognition because it is affiliated to the
Deferred Income from Government Grant/
asset
Unearned Income P12,000,000

Annual Income Recognition = P9,000,000

Computation for acquiring building: 10
Government Grant P12,000,000 Annual Income Recognition = P900,000
Multiply: Pro Rata x ¾ (75%)
Value for Building P 9,000,000
❏ Journal Entry:
Computation for subsidising tuition: - To record income recognition:
Government Grant P12,000,000 Deferred Income Government Grant P900,000
Multiply: Pro Rata x ¼ (25%)
Value for Tuition P 3,000,000 Income from Government Grant P900,000

Note: Building is a depreciable asset so if it is a Computation for Income in Tuition:

depreciable asset we recognize income not when Value for tuition P3,000,000
building is acquired but rather when the building is Divide by: Years / 4
being used. We recognized it using the Income per year P 750,000
Recognition of income related to tuition:
Computation For Income Recognition:
❏ Journal Entry:
Straight Line Method
Deferred Income Government Grant P750,000
Income from Government Grant P750,000
Note: Residual Value you don’t consider it in
income recognition because it is affiliated to the
Note: Combination of depreciable assets and
asset
expenses.
Annual Income Recognition = P1,000,000
Answer to Problem 26-4 (Donation affiliated to
5
depreciable asset )
Annual Income Recognition = P200,000

Note: Deferred income or deduction on a the asset

❏ Journal Entry:
- To record income recognition:
Presentation of government grant related to
Deferred Income Government Grant P200,000
asset - Liability Method
Income from Government Grant P200,000

At the time we acquire the machine

Presentation of government grant related to
❏ Journal Entry:
asset - Asset Method
Machinery and Equipment P7,000,000
Cash P7,000,000
At the time we acquire the machine
At the time of the receipt of Donation ❏ Journal Entry:
❏ Journal Entry: Machinery and Equipment P7,000,000
Cash P1,000,000 Cash P7,000,000
Deferred Income from Government Grant/
Unearned Income P1,000,000 At the time of the receipt of Donation
❏ Journal Entry:
Cash P1,000,000
Computation for Depreciation Expense:
Machinery and Equipment P1,000,000
Straight Line Method

Depreciable Expense = 7,000,000 - 500,000 Computation for Depreciation Expense:

5 Straight Line Method
Depreciation Expense = 6,500,000 Note: Cost of Machinery and equipment is
5 6,000,000
Annual Depreciation Expense = P1,300,000 Depreciable Expense = 6,000,000 - 500,000
5
Depreciation Expense = 5,500,000
5
❏ Journal Entry:
Annual Depreciation Expense = P1,100,000
- To record depreciation cost:
Depreciation Expense P1,300,000
Accumulated Depreciation P1,300,000 Note: Whether the presentation is deferred income
or deduction from assets, the transaction has the
same impact in the income statement.

❏ Journal Entry:
- To record depreciation cost:
Depreciation Expense P1,100,000
Accumulated Depreciation P1,100,000
Answer to Problem 26-5 (Donation affiliated to ❏ Journal Entry:
depreciable asset ) - To record income recognition:
Deferred Income Government Grant P80,000
Income from Government Grant P80,000
Presentation of government grant related to
asset - Liability Method
Presentation of government grant related to
asset - Asset Method
Note: If we use a declining balance method we
don’t use residual value. We ignore it because at
the end of the day the last balance of this is equal At the time we acquire the machine
to residual value. And the assumption of the decline ❏ Journal Entry:
is in the first year of usage of the asset we used it Machinery and Equipment P5,400,000
frequently but in the latter portion we didn't use it Cash P5,400,000
frequently because we do have new assets.
At the time of the receipt of Donation
At the time we acquire the machine ❏ Journal Entry:
❏ Journal Entry: Cash P400,000
Machinery and Equipment P5,400,000 Machinery and Equipment P400,000
Cash P5,400,000
Computation for Depreciation Expense:
At the time of the receipt of Donation
Straight Line Method
❏ Journal Entry:
Note: Cost of Machinery and equipment is
Cash P400,000
5,000,000
Deferred Income from Government Grant/
Depreciable Expense = 5,000,000 x 20%
Unearned Income P400,000
Annual Depreciation Expense = P1,000,000
Computation for Depreciation Expense:
Straight Line Method
Note: Whether the presentation is deferred income
or deduction from assets, the transaction has the
Depreciable Expense = 5,400,000 x 20%
same impact in the income statement.

Annual Depreciation Expense = 1,080,000

❏ Journal Entry:
- To record depreciation cost:
❏ Journal Entry: Depreciation Expense P1,000,000
- To record depreciation cost: Accumulated Depreciation P1,000,000
Depreciation Expense P1,080,000
Accumulated Depreciation P1,080,000
Checking Computation
Liability Method :
Computation For Income Recognition: Depreciation Expense P1,080,000
Straight Line Method Less: Income From Government (80,000)
Net Effect P1,000,000
Note: Residual Value you don’t consider it in
income recognition because it is affiliated to the Asset Method:
asset Cost of Machinery P5,400,000
Less: Record for Government (400,000)
Annual Income Recognition = P400,000 X 20% Total Cost of Machinery P5,000,000
Multiply: Reducing Balance x 20%
Annual Income Recognition = P80,000 Net Effect P1,000,000