INITIAL MEASUREMENT OF PPE
PURCHASE PRICE [INCLUDING IMPORT DUTIES AND NONREFUNDABLE PURCHASE TAXES, AFTER DEDUCTING TRADE DISCOUNTS AND REBATES]
+ DACS [DIRECTLY ATTRIBUTABLE COST [*ANY COST ATTRIBUTABLE OR RELATED TO BRINGING THE ASSET TO THE LOCATION AND CONDITION NECESSARY FOR IT TO OPERATED IN THE MANNER INTENTED BY THE MANAGEMENT
+ DISTMANTLING COST
EXAMPLE OF DACS [DIRECTLY ATTRIBUTABLE COST]
-COST OF EMPLOYEE BENEFITS ARISING DIRECTLY FROM CONSTRUCTION; [CONSTRUCTION, FOR QUALIFYING ASSET]
- COST OF SITE PREPARATION [CONSTRUCTION, FOR QUALIFYING ASSET]
- INITIAL DELIVERY AND HANDLING COST
-INSTALLATION AND ASSEMBLY COST
-COST OF TESTING WHETHER THE ASSET IS FUNCTIONING PROPERLY
- PROFESSIONAL FEES
MODE OF ACQUISTION OF PPE: CASH
CASH PRICE EQUIVALENT XX
ADD: DIRECTLY ATTRIBUTABLE COST XX
INITIAL COST XX
JE:
ASSET XX
CASH XX
MODE ACQ: DEFFERED/INSTALLMENT BASIS
CASH PRICE EQUIVALENT XX
ADD: DIRECTLY ATTRIBUTABLE COST XX
INITIAL COST XX
ORDER OF PRIORITY
1. CASH PRICE
2. FV OF THE NOTE
+DOWN PAYMENT
INTEREST BEARING = FACE
NONINTEREST BEARING= PV OF PRINCIPAL
JE:
ASSET [@CASH EQUIVALENT] XX
DISCOUNT ON NOTE PAYABLE/ INTEREST EXPENSE XX
NOTE PAYABLE XX
MODE OF ACQ: ON ACCOUNT
LIST PRICE
LESS: TRADE DISCOUNT [WETHER TAKEN OR NOT TAKEN]
INVOICE PRICE
LESS: CASH DISCOUNT [MAO NING DISCOUNT NA MAMOTIVATE ANG DEBTOR MOBAYAD UG SAYO]
CASH PRICE
ASSET XX
ACCOUNTS PAYABLE XX
CASH DISCOUNT XX
TRADE DISCOUNT XX
MODE OF ACQ: ISSUANCE OF SHARE CAPITAL
ORDER OF PRIORITY:
1. FV OF PPE RECEIVED
2. FV OF SHARES ISSUED
3. PAR (OR STATED) VALUE OF SHARES ISSUED
JE:
PPE XX
SHARE CAPITAL XX
SHARE PREMIUM XX [WILL NOT BE RECOGNIZE IF THE ASSET WILL BE VALUE @PAR VALUE OF THE SHARES ISSUED
ACQ: ISSUANCE OF BONDS
ORDER OF PRIORITY:
1. FV OF BONDS ISSUED
2. FV OF PPE RECEIVED
3. FACE VALUE OF BONDS ISSUED
JE:
PPE XX
DISCOUNT ON BONDS PAYABLE* XX
BONDS PAYABLE XX
PREMIUM ON BONDS PAYABLE* XX
*WILL NOT BE RECOGNIZED IF THE ASSET WILL BE VALUED AT FACE AMOUNT OF THE BONDS
MODE OF ACQ: LUMP SUM PURCHASE
LUMP SUM PRICE SHALL BE ALLOCATED TO THE INDIVIDUAL ASSETS BASED ON THEIR RELATIVE (OR MARKET) VALUES @ DATE OF ACQUISITION
JE:
PPE 1 XX
PPE 2 XX
PPE 3 XX
CASH XX
MODE ACQUISITION: EXCHANGE
WITH COMMERCIAL SUBSTANCE
FV OF PPE GIVEN UP XX
ADD: CASH PAID XX
LESS: CASH RECEIVED (XX)
INITIAL COST XX
JE:
ASSET (NEW) XX
CASH XX
ACCUMULATED DEPRECIATION XX
LOSS ON EXCHANGE XX
ASSET (OLD) XX
GAIN ON EXCHANGE XX
CASH XX
GAIN OR LOSS:
FV OF PROPERTY GIVEN UP XX
LESS: CA PROPERTY GIVEN UP XX
GAIN OR LOSS ON EXCHANGE XX
WITHOUTH COMMERCIAL SUBSTANCE
CA GIVEN UP XX
ADD: AMOUNT CASH PAID XX
LESS: AMOUNT OF CASH RECEIVED (XX)
INITIAL COST XX
JE:
ASSET NEW XX
CASH XX
ACCUMULATED DEPRECIATION XX
ASSET OLD XX
CASH XX
WITH OR WITHOUTH COMMERCIAL SUBSTANCE
🏗️ Exchange of PPE: Commercial Substance Explained
The concept of “commercial substance” determines how a company records any gain or loss when it swaps one asset (like an old machine) for another (a new machine).
- Exchange With Commercial Substance (Recognize Gains and Losses)
An exchange has commercial substance if the company’s future cash flows are expected to change significantly as a result of the transaction. This usually happens when the assets being exchanged are dissimilar—meaning they perform different functions or carry different levels of risk.
- When it applies: When you trade a delivery truck for a specialized piece of manufacturing equipment.
- Asset Recording: The newly acquired asset is recorded at the Fair Value of the asset given up (or the Fair Value of the asset received, whichever is more clearly determinable).
- Gain/Loss Recognition: Both Gains and Losses must be recognized immediately. The exchange is considered the culmination of a revenue process, so any difference between the fair value and the old asset’s book value is recorded.
- Exchange Without Commercial Substance (Defer Gains, Recognize Losses)
An exchange lacks commercial substance if the company’s future cash flows remain essentially the same. This generally means the assets being exchanged are similar—performing the same function or serving the same purpose.
- When it applies: When you trade an old model of a forklift for a brand-new model of the same forklift.
- Asset Recording: The newly acquired asset is recorded at the Book Value (carrying amount) of the asset given up.
- Gain/Loss Recognition:
- Losses are recognized immediately (conservatism principle).
- Gains are NOT recognized (they are deferred). This is because accounting rules prohibit recognizing a profit from merely swapping similar assets; the exchange is not considered the completion of an earnings process.
MODE OF ACQUISITION: TRADE-INS
FV OF PPE GIVEN UP XX
ADD: CASH PAYMENT XX
INITIAL COST OF NEW ASSET XX
IN CASE FV PPE IS NOT AVAILABLE
TRADE-IN VALUE PPE GIVEN UP XX
ADD: CASH PAYMENT XX
**INITIAL COST OF NEW PPE* ** XX
*EQUIVALENT TO THE FV OF THE NEW ASSET
- TRADE IN IS A PAYMENT IN A FORM OF AN OLD ASSET
MAY COMPUTED AS:
CASH PRICE WITHOUT TRADE IN XX
LESS: CASH PRICE WITH TRADE IN (XX)
TRADE IN VALUE XX
GAIN OR LOSS
TRADE IN VALUE XX
LESS: CA OF PPE GIVEN UP (XX)
GAIN OR LOSS ON TRADE IN XX(XX)
DEPRECIATION: STRAIGHT LINE METHOD
ANNUAL DEPRECIATION = COST - RESIDUAL VALUE/ EST. USEFUL LIFE (IN YEARS)
DEPRECIATION: SUM-OF-YEARS (SYD)
ANNUAL DEPRECIATION = DEPRECIABLE AMOUNT X UL AS OF THE BEGINNING OF THE PERIO/SYD*
*SYD: N(N+1)/2
DEPRECIATION: DOUBLE DECLINING BALANCE METHOD AND DECLINING METHOD
AKA 200% DECLINING BALANCE METHOD
ANNUAL DEPRECIATION = CARRYING VALUE, BEG X 2/UL
ANNUAL DEPRECIATION = CARRYING VALUE, BEG X 1.5/UL
*RESIDUAL VALUE - IGNORE EXCEPT IN THE FINAL YEAR OF ASSETS USEFUL LIFE
DEPRECIATION: WORKING HOURS METHOD
INPUT
DEPRECIATION PER HOUR = COST-RESIDUAL/ EST. UL (IN SERVICE HOURS)
OUTPUT
DEPRECIATION PER HOUR = COST-RESIDUAL/ EST. UL (IN UNITS)
DEPRECIATION: COMPOSITE OR GROUP METHOD
COMPOSITE LIFE = TOTAL DEPRECIABLE AMOUNT/TOTAL ANNUAL DEPRECIATION
COMPOSITE RATE = TOTAL ANNUAL DEPRECIATION/ TOTAL COST
MODE OF ACQ: DONATION
-IF FROM SHAREHOLDER - FV OF PPE RECEIVED
WILL BE CREDITED TO DONATED CAPITAL
JE:
ASET
CASH
