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Chapter
'
17
PROPERTY. PLANT a EQUIPMENT & Subsequent Costs
Acquisition
Historical Cost of Property. Plant And Equipment
is the cash price (net of trade discounts and rebates) and 0t : cm mincidental costs incurred in connection with its ambition plus necessary
costs incurred to bring the asset to its present location and condition and to the asset for its intended use. prepare
on amount subject to cash discbunt - is the purchase pnce (net of trade and rebates).
discounts
other incidental
costs
net of the cash discount
whether
incurred
with
in connection
taken
its acquisition
costs incurred to bring 'the asset to its present necessary and to prepare the asset for its intended use. condition
Went costs
or not and
plus
location
and
(but with a cash pnce)- is the cash price and other maidental incurred in connection with its acquisition plus necessary costs
and conditionand to incurredto bring the assetto its present location asset for its intended use. prepare the
Q
«
installment plan (without By a detbnad all future payments. discounted value of Issuance
afDebt
0! Equity
securities
a cash pnce) ' _ .
«- 18 the present
- is the fair market value of the asset
received or securities issued whichever 18clearly determinable.
~thefair market substance valueoftheasset withcommercial Exchange received
or asset
loss is recognized
measured
whichever
in their entirety.
mtbout
Mange
Motion
surrendered
at carrying
is clearly
' '
determinable.
0:
Gain
.
commercial substance - the asset received 13 initially value.
Gain or loss is not recognized.
- the asset received is initially measured at its fan market value
with a coiresponding credit to Additional Paid In Capital/Shaxe Premium. 1: e.
114.133 9 - . a_-:action The
cash
flows
of the
=:Comm asset
received
«3. 1:11:11: 1 eWhea: differ
from
the
cash
flows
of the
asset transferred and the difference 18significant relative to the fair value of the asset exchanged.
~316-
b.
Ciapur 17
The entity
specific
value
of the portion
of the entity'
8 operations
by the transaction changes as a result of the exchange relative to the fair value of the asset exchanged. W value
is the present value of the cash flows an entity the continuing use of an asset and from its disposal useful life.
from
Examples a. Cost
of Directly Attributable of employee benefits
affected
is significant
to arise expects at the end of its
Costs arising
directly
from
construction
or
of the item of PPE acquisition Costs of site preparation
99-9? Initial
and handling costs delivery Installation and assembly costs Costs
of
deducting
whether the asset is testing the net proceeds from selling
functioning any items
properly, produced
after while
bringing the asset to that location and condition (such as samples f.
when testing produced fees Professional
the equipment)
Exam les of ~sts that are not co: : of an item of PPE a. Cost of opening a new facility a new product or service (including cost of b. Cost of introducing advertising and promotional activities) c. , Cost of conducting business in a new location or with a new class of customer (including costs of staff training) d. Administrative and other general overhead costs Subsequent Costs - the costs of the day to day servicing of an item of property, plant and equipment are recognized in the profit or loss as they are incurred. Costs of day-to-day are primarily the costs of labor and other consumables. and may include the cost of small pans. The purpose of these expenditures is often described as repairs egg maintenange" (PAS 16). Parts of some PPE may require replacement at regular intervals. Items of PPE may also be acquired to make a less frequently recurring replacements or to make a non-recurring replacements. Such items of PPE is recognized ' (when it is probable that future economic benefit associated with the item of PPE will flow to the entity and the cost of the item can be measured reliably) but the carrying amount of those parts that are replaced is dereoognized (PAS 16). 9
ant
t R
'tion:
Cost Model - after recognition as an asset, an item of PPE shall be carried at its cost less any accumulated depreciation and any impairment loss.
Marty. Plimt«Ewe
- 317-
Com
Acqum'nbn «3mm:
Kamluaa'aa Model after recognition as an asset. an item of PPE whose fair
game can be measured reliably shall be carried at a revelued amount, being its fair value at the date of revaluation less any subsequent accumulated
depreciation and any subsequent impairment losses. Revaluation shan be
made with sufficient regularity to ensure that the carrying amount does not . differ materially from that which would be determined using fair value at
balance sheet date.
Problem 17 .. 1: (Acquisition-Cash
'
Basis)
The Knight Company imported an equipment at a peso equivalent to 191330.000;. The company has to payadditional cost of importing the asset such as P10.000 import duties and P15,000 non-refundable purchase taxes. Costs of bringing
much
isthe
a)
P330000
b)
P336.000
Purchase
initial
'
'c) P346000
. d) P361,000
x D . _
. P330000
price (peso equivalent)
Import duties
.
'
cost of the new machine?
' *
Answer:
and P1.000 testing and trial run costs.
cost, P3,000 installation
transportation How
and preparing the asset for its intended use include P2,000
:
Non-refundable taxes Transportation cost '
\ ~
Installation cost
Testing and trial run cost
Cost of the new machine
. 1-
-
.
.
2,000
' » ,'
\ 3,000
. t
w ', .
H 10,000
~
.
,
f 15,000 .
'
'.. .
'____1_,_0_00_
M
PAS 16, pan 16, states that the cost of an item of property, plant and equipment comprises its purchase priceincludzhg import duties and nan-temndable purchase taxes, after deducting trade discounts and rebates; any cost directly atmbutable to bnhgzng the asset to the location and condition necessary {or 1': to be capable of operating
Preblem
in the manner intended by management.
17 - 2: (AcquisitionOn
account)
Light Company has recently purchased a computer system for its office. The
following information was gathered in relation to the acquisition of the unit; List price Trade discount and rebates taken Installation and assembly cost
. .
Initial delivery and handling cost
P152000 56.000 3.200
6.400
Purchasediscount
2%
istheacquisition cost ofthenew computer? Wha; a) 94.080 0) b)
P103.68O
P105,680
d) P160600
*318.
Cfapur
Anem-
ListPrice
.
B
9152.000
Less:Tradediscount
m
Invoice price Less: Cash discount (2% of P96.000)
,
1 96,000 ._..L229
Net
Add:
17
P 94,080 and necessary coats to bring the asset for its intended use. P 6.400 Initial delivery and handling costs. An incidental and prepare
'
Installation and assembly cost
~
Total cost of the new asset
.1299.
___Q,§QQ
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ie the cash pdce eqw'velem The cost afar: item afpmperty, plant and equment on recognition date. Yhe cash price equivalent ofan asset acquired on account subject is made mm the discount period is equal to its invaiee to dxzs'countifpeyment mae that when less the discount on the invoice amount taken. Implicit in the transecuon the dzlecount is not taken because the entity did not settle the invoice amount within ~ the discount factor" and 1: value afmoney period, the discount' 16' construed as time
eauswdered as a cost of delayed payment
and should never
be a part
assetacquired at the timeof acquisition.we costaf delay outright as an expense
(discount
- .,
lost)
a! the east
cf
be zwognxzed should
Problem 17-3:(AcquisitienDewrred Basis) On August 1, 2008, Bright Company A down payment payment basis.
on a deferred purchased a new machine of P100,000 was. made and 4 monthly
installments of P250,000 each are to be made beginning on August 1, 2008. The cash equivalent The terms of the agreement is not considered normal.
price of the machine was P950.000. Bright incurred end paid installation . I
costsamountingto P30,000.
s
_
How ofthemachine? A, ascost much should becapitalized a) 9950.000 b) P980,000
Ahewet:
: c) P1.100000.
'
B
Cashprice
,
d) P1.130,000
~
' ..
99503000
Installation cost
M
Cost of the new asset
w
*
1
PAS 16. par. 23 states that cost of an item efpmpetty. plant and eqwpment ieithe cash plies equivalent at the recognition date. preyment is deferred beyond name! credit toms, the djebtehee between the cash price equivalent and the total payment is mcagm'zedes intetest over the period ofaredit tmlese such interest is recognized in' the earning amount of the item in eccatdance with the allowed alternative treatment
[hPASZZ
W
W}
L WW
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costs
xicqmsinbn MSW
Basisw/ a CashPrice) problem17-43(AcquisitiOn-Insta11ment new 1, 2008, Flight
On August
deferred payment basis.
Corporation
purchased
a
machine on a
A dowmpayment of P200000 was made and 4
of P600,000 each are to be made beginmng on Terms of the contract are not normal in the industry
annual installments september 1. 2008.
where the same types of assets are being traded. Due to an employee strike, Flight could not install the machine immediately, thus, incurred P3,000 of
storage costs. Cost of installation (excluding the storage cests) amounted to 920.000: The cash price of the machine was P2,300,000.
ascostofthemachine? am} muchshouldbecapitalized 3) P2300000 1,) 132,320,000
Answen \
make
,
cost
.
d) P2,600,000
"
.
17
Mighty, December
-
'
new asset.
. Problem
.
\
B
Cash price Instanation
Costof
°c) 192,323,000
-
'"
3
'
P2,300,000 20,009
223203200
5: (AcquisitionDeferred
Basis)
Inc.
eight
a machine under a deferred purchased 31, 2007. Under the terms of .the contract, annual
The applicable
payments
of P490,000
payment contract Mighty is required
each beginning
December
on to
31. 2008.
rate is 8%.
interest
Q
WhatIsthepurchase priceofthemachine? a)
P4,862, 165
.
b) P3,041,150
0) P3, 920,000
. '
Answer:
.
(1) P2,815,834
',
D
Cost of new
asset (P490, 000 x 5. 7466)
=
M
Ifan asset is acquired an a deferred payment terms, it should be measmed a In cash price but if the cash price is not explicitly stated. the deferred payment should
be reduced
to present
value
through
the application
of the Mrs
discount Since the present value hater of the hnplz'cit rate a! 8% a not rate. given. it can be computed that the use ofPIesent Value {amulet
PIOblem 1'7 6: (AcquisitionDeferred Basis)
. Night Company bought a new machine and agreed to pay fat it in equal annual
installments
of P500,000
at the end of the next hve years.
Assume that the present value of a prevailing interest rate at 15% for five periods is 3.35. The future amount of an ordinary annuity of 1 at 15% for five periods is 6.74: The present value of 1 at 15% for hve periods is 0.5.
- 320 -
'
aqua M
How much should Night record as the cost of the machine?
c) P2.500,000 d) P3.370.000
a) P1.250,000 b) P1.675.000
'
3
Answer:
P
Annual installment x Present value of annuity of 15% for 5 periods '
500,000 3.35
- W
Cost of the new asset (machme)
17 7: (AcquisitionBy Problem TradeIn) On March 31 2008 Mr. Right Enterprises traded in an old machine having a carrying amount of P1.600.000 and paid a cash difference of P600 000 for a new machine
On March
having
a total
31 2008." what
o
cash price _of P2,"000.000.
amount
of loss should
Mr. Right
recognize
on this
exchange?
a) b)
None _ P200000
9).P400.000 _ d) P600,000
-
Answer:
8
I
V
'
Trade-in value 000P600 value/fair (P2. .000) P1,400,000 000, .
Carryingvalue
Loss
M
W
lithe casbpdce isPZOOQOOOand onIyP600,000 mspaid. valued at P1, 400,000. the cost of the new Incidentally
then, the old assetis burly assetds the cash price of
£2,000,000.
BasedPayment) Problem17- 8: (Acqmsition-Share issued 10,000 shares On October 1. 2008. Jet Corporation treasury ordinary share for a parcel of land to be held for a The treasury shares were acquired by Jet at a cost of P30 ordinary share had -a fair market value of P40 per share on Jet received P50.000 from the sale of scrap when an existing site was razed. , At what amount
should the land he carried?
a) P250000 . 12) P300000 W
_ , .
,
'
c) P350000 d) P400.000 t
C Market value of share (10,000 x P40) Less: Salvage value
P400900 m
Cost of new asset(land)
w
3' O
1a
of the P25 par future plant site. Jet's per share. October 1 2008 structure on the
mm, mm
- 321-
JCthzbn «£3.46stCost:
aim
$119858 [fan asset 129acquired thru a share-baeedpayment, the cast of
The fair value of the 8559i mowed
value of the asset received
market
shall be the
measured by the fair value of the shares tuned
is 0119:;
ypmceede ham the sale of salvaged matedal of; newly acquired auet shouldhe Any ga'justed/deducted ham the hu'tiel cost of the new asset
problem 17 9: (AcquisitionBy
In June 2008, Plane Company
Exchange)
exchanged an old packaging machine, which
pad 3 cost of P1,200,000 and was 50% depreciated. {01'8 non-monetary asset.
The market
value
machine was determined
of the old packaging
to be
??OOtOOO.
Whatisthecostofthe.newasset acquired? '
a) P600000
0) 9700.000
.
1)) P660,000
d) P860,000 6'
Answer:
h' an item of Property, asset
monetary
125' acquired in exchange for 8
Plant and Equmeht
or a combination
and hommmvetaty
ofmonetazy
asset,
the
cost of the asset received is measured at its fair market value unless the transaction lacks the necessaty substance. commercial exchange Any amount of gain or Jose is recognized it: its entirety (PAS 16'). 2 I
QJJALJ
0
IL
222a cash
!!-;L_-;.-' age I br » ¬111LJ am}
flows
of the
asset
received
:1 L131
(life!
a» W
ham
:1.
the cash
Hows
of the
119 asset transferred and the dzh'ezehce significantIrelativeto the fair value of the asset exchanged
0
a
value .of the portion of the entity's operations Me ehhty epeahc the transaction changes as a result of the exchange and the metedhy
eigwfcaht relative toythe fair value of the asset exchanged change 125' value 125'the 19193th value of the cash tlows an entity
Ena'ty-epea'ia
to arise hem the coha'mahg use of an asset and ham its We disposal at the end afite ueehz] me.
' 10: {Acqulsl tion-By
Problem 17 In October
2008, Ship Company:
Exchange) exchanged
a used packaging
machine
Raving a book value of P240, 000 for a new machine and paid a cash 'iffetenoe of P30, 000. The market value of the used packaging machine was aternn'ned
to be P280. 000.
M};
In its income
v much range
Vane 10,000
gain
should
is considered
statement
for the year ended December
Ship recognize
with
commercial
'
on this exchange, substance?
c) P30,000 d) P40,000
31. 2008.
assuming
the
322 -
CEaptcr 17
Answer: D Market value of asset given up Book value of asset given up
P280.000 .ZAQQQQ
Gain on exchange
Question recognize
2.42.999
2. On the date of exchange, as
considered
the
cost
not lacking
of the
asset
received,
in commercial
\b) . P250,000
Qgst
should
Ship Company
the
assuming
is
exchange
\ d) P310,000 D
Answer
amount
substance? 0) P280,000
P200000
a)
what
of the new
.
, egg
is;
Market value of asset given
'
Cashpaid
«
'
'
'
P280,000
I ., '1 .
Market value of asset received
.
___3_Q_LQ_QQ
M
/
Problem 1711:(Acquisition-By Exchange) in 2005 for P3 000. 000.
Star Company owns a tract of land which it purchased
plant site and has a fair market
The land is held as future
on March 1, 2008. Struck Company plant
site.
Struck
paid
of land
also owns a tract
for the land
P4,200,000
in 2004
value
and
the
of P4, 800 000
held
as future
land
has
market value of P6,000,000 on March 1. 2008. On this date, Star its land and paid P1, 200,000 cash for the land owned by Struck.
a fair
exchanged As'a result
of this transaction, entity' 9 specific value was not affected by the above the . exchange. _
should Starrecord theiandacquired in the .Questiogi ' Howmuch . exchange? , a) P4,200,000
b) P4,800,000_-
,
g
'
,
'
.
L \ a) P5,400. 000
f
\
d) P6,ooo,-ooo
¥ : _ Answer: , A . . Book valueofland . _'f ' \ P3.000,000 given Cash paid 1.209.909 Cost of land acquired
-
\
,
.W
.Si'me the exchange tramaation IaCks the necessary commends! substance. received should be valued at its canying
W
the asset
value.
What onthe Sta:Company amount ofgainshould recognize
exchange?
, c) P120,000
a) None 1» 930.000
_
d) P180000
.
{Phatd5Wt:
W
- 323-
chquisition 6631;63:thCam
A Answer: What! the exchange lacks the necessary commercial substance. gain 01'loss is not recognized
an exchange
(PAS 16)
0
Exchange) problem 17- 12: (Achsition-By Teen Company exchanged a delivery van and P50 000 cash for a newer van owned by Quest Corporation The following data relate to the values of the
vans on the date of exchange: '
Teen
._
'
Quest
P300,000
P450.000
400,000
500.000
,
' )
.
-
'
.
after the exchange. Teen Company determined that the cash Immediately , . flows of van received differ from the cash flows of the van transferred. the
What is the cost of the new asset acquired as basis for recoding
W in the
books
of Teen
a) ' P300v000 1)) 9400.000,
! -
Company?
, -\ ,-
n
y,
., . 2
i
.C) P450,000 P500000 (rd)
' Anewm:
. . D, , ~. i, -. ' , , Cash paid _ Fairvalueof the vantransferred . *1 ' ,
, Fair value of assetreceived
,
.'P 50,000
'
$50,000
aM
When the cash £00173 hi the asset receiveddimertom the cash 17mmof the asset the
transferred,
W vans?
a)
is measured
received
asset
,
None
has the necessary at its fair market
'
.
3'
'.
j
~. D, . of van transferred
.
On March
'
value.
substance
theretbm,
the
.
. P450,000
17 - 13: (Acquisition-By 1, 2008, Extreme
c) P 10,000.
d) P150,000
Carrying value of van transferred Gain on exchange .. . .
Problem
commercial
as a on the Teen of amount What report gain exchange sheuld ~ \_ ~ _ .'
b) P7,000 Answen7 Fair value
exchange
'
390.999 M
Exchange)
Company exchanged
an old machine
having
a
of P100000 for another cost of P450,000 and accumulated depreciation machine having a fair market value of P300,000. Extreme Company has to after the exchange. Extreme pay P72,000 to even-up the trade. Immediately that the cash flows of the machine received differ from Company determined the cash
flows
of the machine
transferred.
' 324
C5¢p¢or ,7 - What is the cost of the new machine in the books of Extreme?
a) 9280.000
0) 9440.000
b5 P300.000
(1) 9600.000
Answer?
B
If an item «Property, Plantand qudpmeat 15acquired in mbaage to, .
monetazy asset or a combmatiou ofmonetary and non-monetaty asset, the cost of the asset received is measured at its fair market value unless an exchange transam'oh lacks the necessazy commercial substance.
An
amount 0! gain or loss is recognized in its entirety.
exchaag.
when the cash 00w. transaction has the necessary commercial swstance of the non-casb asset received We: kam the cash now: of the naa-caah asset transferred
(PAS 16).
What amountof lossshouldthe companyrecognizeon the
W
,
exchange?
a) None b) 950,000
'
.
' n
\
.
/
c) P122,000 d) P150,000
Market value of asset received
Cash paid
- Market value of non-cash transferred
. '
, .'
.
.5
- -
,
. _ '
'
P300.000
,
LEM
=
P228,000
valueofnon-cash transferred (P450, P100.000) W Carrying 000 . . .Losson exchange ._ W
10! Gui}: a!10::ananitemofptopattn planthadequment'acqm'red by exchange nan-manetaty at a combination of monetary and nonemonetaty 12mm
aammarah! substance 113recognized in its enurety
asset
having
the
(PAS 16').
17- 14: (Acquiéition-By Problem Exchahge) On July 1, 2008, Challenger Corporation exchanged its non-monetary asse (equipment) with another non-monetary asset. The following data were made
available:
' Equipment Accumulated Depreciation Fair value of equipment
Cash received on exchange
'
.
P4.400.000
-
2.000.000 3.000.000
,
900.000
assetswere not the same, the cashflowsofthenonomonetary the cost of the non-monetaryasset received? a) P2. 100 000 . ) pl. 500,000
S)171,680,000
d)P3.000.000
what
would
32}-
Www¢WW¢WCM 6'
.
Market value of non-monetary asset (gqulptnonz)given Less: Cash received Market value of the non-monatary nag
for another
W W
recanted
- 15: Exchange) (Acquisition-By Problem 17 Sun 2008. Rising Company paid P700.000 During which has a carrying amount 92,000,000 equjpment 92,100,000
P3.000,ooo
and Whanged an and a fan value of
in the same line 0 business
equipment
With 3
V811
of Pz.800.000If the exchange
W
has the necessary
commercial
substance.
Sun Company should record the new inventory received at - ' a) P1.700.000 c) 92,100,000 P2.000.000 1,) _ d) p2,eoo,ooo D
Ansmr:
.
.
I
Fair value of asset given Add: Cash paid
P2300900 M
,
Cost of new inventory In
'
ant Fair value
Less:
W
t
'29
value
.
M
.
guesgign 2: P2,000.000
should record the inventory at: .
'
b) P2.7oo,ooo Ansmn
M
If the exchange lacks the necessarycommercia!substance.
Rising Sun Company '
Carrying
P2,100,000
'.
Gain
a)
1' .'
I .
_
Carrying
Rim
c) P2,800,000
'
d) 122300.000
. '
B
.
value of inventory transferred
Cash paid Cost of inventory received
.
P2,000,000
~
--__'_7QQ._QQQ w
If an item ofproperty,
plant and equipment acquired by exchange that is hchng in
commercial
substance, the cost ofsuch asset is determined at the carrying
necessaty
value ofthe asset waived
or can'ying value afasset(s) given. _
Problem 17 - 16: (AcquisitionBy Exchange) On December 31, 2008, Canary Company traded equipment with an original cost of P400.000
and
accumulated
depreciation
of P160.000
for another
equipment. - In addition. Canary received P20,000 cash in connection with
this exchange. The exchange transaction lacks the necessarycommercial substance.
326-
17
CW
Whatistheamount ofgainshould recognize Canary a:amumnQ
W:
)9 fair valueof assetreceivedis P240.000? 3)
None
c)
5) p20.000
P40,000
d) peo,000 A
W
.
lacks the necessary When the exchange ttansaction commerciq, substance, the cost ofan item ofprapezty, plant and aqw'pment 15 recorded at cost: 2219cast is detenmned at the cannhg value ofnon-monetary asset Gain 19 .or transferred whichever is determinable. received clearly 3Q; recogmzed
f
.
What is the amount of loss should Canary recognize assuming
W:
1% fair value of aSsetreceived is P200,000? a) none
'
.
_
c) P40.000
b) 1320.000
.d) P60,000
Fair value of non-monetary
asset received
. , ' . ' Cash received Fair value of non-monetary given up,
,
asset given Carrying value of non-monetary loss to be recogniZed , Impainnent
-' up
P200900
. _, '
20,0319, P220,000
.( .
240,000.
w
Problem17- 17: (AcquisitionByDonation): Snow White
Corporation,
an investor
of Wolf Company,
owned
of real estate consisting of land and a factory building. Snow for Wolf title to this realty to Wolf Company as an incentive
an idle
. parcel
White gave 1:0 establish
manufacturing operations in the area. Wolf paid nothing for this realty which had a fair market value of P2,00_0,000at the date of the grant.
How shouldWolfrecordthis non-monetarytransactibh? a)
Memo entry only.
.
13) Credit to accumulated
a)
d)
. profits
and losses for P2,000.000.
Credit to unearned revenue for P2,000,000. .
Credit to equity reserve for P2,000,000. '
Answer
D
"0190 an item of property,
.
plant
and equment
is received
through
donahon or discovery,there is no cost that can be used as a hasis {0!
to measurement. 272913may be some ewendztures incurred incidental acqwls'ition but these costs are generally less than the real value of the
donated asset. Hence, property, plant and equipment acqzured through donation should be appraised and recorded at its M.
value and Ma donatedassetis recognizedand measuredat fair market " also at the {air account the to credit reserve equity a corresponding With
value of the asset. the
don,
~327-
Wgwcau
WM¢W account
However, if the donor is not in any way related to the Equity
would not be aPPIOpn'ate
Rm
instead a mvenue account at a [jammyaccount wouldbe used.
to used,
17 - 18: (Cost of Self-Consuucted Asset) problem has constructed its own special equipment t0 produce a gamer Company newly developed product.
A bid to construct the equipment b? an outside
incuned company was received for P1.200.000. The actual costs to construct
the equipment
Direct
material
Direct
labor
It is estimated
were as follows:
P320,000 200.000
thatincremental
140% of direct
labor costs.
by Reader
overhead
costs for construction
amount
In addition, fixed costs (exclusive of interest)
to
of
to p700.000 were incurred period and allocated during the construction on the direct basis of labor total pxime costs (direct . production plus material).
The prime costs incurred to build the new equipment total
prime
. capitalizing
costs
incurred
for the period.
amounted to 35% of the
The company
all possible costs on self-construction
follows
the policy of
projects.
in financing the construction a P500.000. 10% of the equipment. at the beginning of the 6-month construction The period. acquired no other debt except for trade accounts For payable. company carries all assume that construction took expenditures place exactly simplicity. that all the took is. project. expenditures place with 3 midway through in the construction months remaining period.
To assist loan was
What is the cost to be assigned a) P 800,000 1,)
to the new equipment?
91.020.
Answer:
c) P1,045.000 (1) 91,070,000
D
Direct matedal Direct labor
P 320900 200'000
Venable overhead (P200.000X 1-40) Fixed overhead (P700.000x 0.35) Total costs exclusive of interest
280'000 .355-999 P1945900
Interestchargescapitalized
' . Totalcostof eelfconstructed equipment
. 4m. W
,Imetm x10% x3/12 =25.125 . year 1.040.000 m: m 0 mterest mm. paid: =25.000 x10% x6/12 500.000
.328.
17 Chapter
Problem 17 - 19: (Borrowing CoetSpecIEc Borrowings) On January 2. 2008. Milestone Company was granted a loan of P2.000.000 at an interest rate of 1096 specitically to hnance the construction of its new building. Aveilments from the loan were made quarterly in equal amounts. costs amounted
Total borrowing
to P125000.
Prior to their
disbursements.
the proceeds of the loan were temporarily placed in a special savings account and earned interest income amounting to P20,000. The building was completed on December 31, 2008.
Using the alternative treatment, how much should Milestone Company capitalize as borrowing costs? a) P105. 000 . b) P125000 Answer:
c) P195,000 d) P200,000 -
A
Actual borrowing costs Less: Interest on temporary placement
P125900 JQQQQ
Borrowing costs to be capitalized
gm
for harrowing cost of a quahjang
Ihe W
outright to amuse. alternative
to the why
'
,
'
asset is charged
However, once the enterprise has adapted
the
treatment as its accounting policy, interest costs shall be added '
value ofag quelifyzhg assets (PAS 23).
Capitahzatioh afhertomng cost should commence when: (a) Emehditwe far the asset is being incurred. (b) Borrowing costs are being matured. (c) Construction is in progress,
Capitahzation of honouring costs should cease when the asset is substantially complete. If all that is left are minor modihcations, such as decoration or routine administrative substantially
work, then the asset is considered
to be
complete.
Capitalization of harrowing costs should be suspended during extended in which active development is interrupted unless that period is necessary part of the process for the production of the asset. However,
periods
,
capitahzetzon of borrowing costs should not be suspended when there is anly a temporary delay that is caused by certain expected and anticipated reasons such as while an asset is going ready for its intended use.
are takenapeahcally toacquire, orpmduce construct 1 When bohemnga e quahbqhg asset, the honomhg costs that relate to that particular quahmhg asset are readily identihable, which means it is easy to
quantity the harrowing costs that would need to he capitahlzed by using costs that the pmceae o! ehmihah'on, that is, capitalizzhg the 1:0ng
~329-
mat a equipment:xcqndsiu'm «1:51.63th Costs
Wm}
Wouldhave been avoidedhad the expenditureon the qualifying 8859:
not been made.
When made bormwed specm'celly to finance a quehhnng asset are not
2'
uwized
immediately
and instead the idle funds are invested
the honouring gnu] nequired, costs that income resulting reduced by any investment
temporarily
are capitalized should be #0127 the theStment of idle
Made.
or genetally, and wading If borrowing are organized centrally a weighted average capitahlzation rate may he applied to 19 eXpenditutee
3,
on the qualifying
17 - 20: (Borrowing
problem
started
.Visage
asset.
Cost-Specific a building
constructing
Borrowings)
for its own
in JanuafY
use
2008.
During 2008. Visage incurred interest of P75,000 related to the building and P30.000 on other borrowings. construction. On the same year. the incurred company P60,000 interest computed on the weighted-average of accumulated
amount
much
How
interest
cost. should
treatment?
under
capitalize
the
alternative
the
altemative
.
c) P 75,000 d) P105,000
.
B
Answer:
Ihe
Visage
_
P30,000 P60,000
a) b)
for the building.
expenditures
borrowing
treatment
cost
is based
emehdjtures.
that
may
on the
be
weighted
capitalized
under
average
amount
of accumulated
2711'sweighted average accumulated expenditures
concept
avmdahle interest concept, which h'hu'ts the lower of the actual ' applies the Avoidable interest cost incurred during the period of avoidable interests. mterest is the interest cost hzcwred during the period that theoretically of the asset had not been made. could have been avoided if amenditure
17 - 21: (Borrowing
Problem
CostSpecihc
Borrowings)
Faith, Inc. has a fiscal year ending April 30. On May 1, 2007, Faith borrowed P10,000,000
at 15% to finance
construction
of its own building.
Repayments
of the loan are to commence on the month following completioh of the building. partially incurred
for the During the year ended, April 30. 2008, expenditures were structure totaled P6.000.000. These expenditures completed the year. Interest earned on the unexpended evenly throughout
portion of the loan amount to P400900 How
much
should be shown
for the year.
as capitalized
interest
on Faith's
financial
statements at Aptil 30, 2008 under the alternative treatment? a) None _ c) P 450,000
b) 550.000
d) P1.100.00 r1
\*
~330-
Cliaptcr17 C
Answer:
.
Average expenditures (P6,000,000 -:-2) x Interestcapitalization rate Interest that may be capitalized
an alternative treatment No amount ofborromng of a quakiwhg
133,000,000 15%
under
,
W
cost shall be capitalized
asset using the benchmark
capitalized in accordance with the mterest rate to the average dwzhg the period or weighted during the period. 2713amount
to the construction
that 15 identified
treatment.
the amount
However,
to be
the altemative treatment is detemnhed by applying amount of accumulated expenditures for the assets average of interest rates on a]! debt: outstandmg of mterest determined is not reduced or in any way
met by interest income eamed during the conétmction pen'od.
.
17 22: (BorrowingCostGeneralBorrowings) Problem \The following transactions 2008 by Victory
companysnew
made
pertain to the general borrowings
Company
in connection
warehouse: -
,
the
