RECORDING PURCHASE AND DISPOSAL OF ROPERTY, PLANT, AND EQUIPMENT

(PPE) or FIXED ASSETS

Characteristics of PPE:
1. Physical substance (a definite size and shape)
2. Used in the operations of a business
3. Not intended for sale to customers.

Determining the cost of property, plant and equipment

Land
• Purchase price plus stamp duty or documentary taxes
• Settlement costs such as title and lawyer’s fees
• Real estate agents commissions
• Accrued property taxes and other liens on the land assumed by the purchaser
• Necessary costs incurred to make land ready for its intended use
o When a vacant land is acquired, expenditures for clearing, draining, filling, and
grading are debited to land account.
o If the land has a building on it that must be removed before construction of a
new building, all demolition and removal costs, less any proceeds from
salvaged materials, are debited to the Land account.

Land improvements – structural additions made to land such as:

• Driveways, paving
• Car spaces
• Fences, lighting
• Landscaping
• And underground sprinklers
• All expenses necessary to make the improvements ready for their intended use.

Buildings - facilities used in operations, such as stores, offices, factories, warehouses .

All necessary expenditures related to the purchase or construction of a building is debited
to the Buildings account.
• Purchase price
• Stamp duty or documentary taxes
• Settlement costs (lawyer’s fees, title insurance, etc., real estate agent’s commission
• Costs to make the building ready for its intended use
o Remodeling and replacing or repairing the roof, floors, electrical wiring and
plumbing
o When a new building is constructed, contract price, payments for architect’s
fees, building permits and excavation costs.
o Interest costs incurred to finance the project maybe included when
significant period of time is required to get the building ready for use.
Interest is limited to the construction period, when construction has
been completed, subsequent interest payments on funds borrowed to finance
the construction are debited to Interest Expense.

Equipment – Assets used in operation such as check-out counters in shops, office

furniture, factory machinery, delivery trucks and other equipment used in the operation of
the business.
• Purchase price
• Freight charges
 • Insurance during transit paid by the purchaser.
• Expenditures required in assembling, installing, and testing the unit

Depreciation – allocation of the depreciable amount of a PPE asset to expense over its
useful (service) life in a systematic manner. The depreciable amount of a PPE asset is
generally the cost of the asset less its residual value. Depreciation is a process of
cost allocation, not a process of asset valuation. So, the carrying amount (cost less
accumulated depreciation) of PPE asset may be quite different from its fair value.
Depreciable cost is the cost of the asset less its residual value.

Depreciation applies to three classes of PPE: land improvements, buildings and

equipment. Each asset in these classes is considered to be depreciable asset, because
the usefulness to the entity and income-producing ability of each asset will decline over
the asset’s useful life. Depreciation does not apply to land because its usefulness and
income-producing ability generally remain intact over time. Thus land is not a
depreciable asset.

Factors in computing depreciation

1. Cost – issues affecting the cost of a depreciable asset.
2. Useful life - the estimate of the asset’s expected productive life, also called service
life. Useful life may be expressed in terms of the time period over which the asset is
expected to be available for use. It may also be expressed in terms of the number of
units of production or the output expected to be obtained from the asset,
3. Residual value – is the current estimate of the asset’s disposal value, net of
disposal costs, if the asset is already of the age and in the condition expected at
the end of its useful life. The disposal value may be based on the asset’s worth as
scrap or on its expected trade-in value. Like useful life, residual value is an
estimate. In making the estimate, management considers how it plans to dispose of
the asset and its experience with similar assets.

INCOME EXPENDITURE AND CAPITAL EXPENDITURE

Income Expenditure – costs for ordinary repairs, additions or improvements. Ordinary

repairs are expenditures to maintain the operating efficiencies and productive life of
the PPE item. They usually are fairly small amounts that occur frequently. Motor
tune-ups and oil changes, the painting of buildings and the replacing of worn-out gears on
machinery are examples. Such repairs are debited to Repair (or Maintenance) Expense as
they are incurred.

Capital Expenditure - Additions and improvements are costs incurred to increase the
operating efficiency, productive capacity, or useful life of a PPE item. They are usually
material in amount and occur infrequently. Additions and improvements increase the
entity’s investment in productive facilities and are generally debited to the PPE asset
affected.

PROPERTY, PLANT AND EQUIPMENT DISPOSALS

• Retirement – PPE is scrapped or discarded
• Sale – PPE is sold to another party
• Exchange – Existing PPE is traded for new PPE

At the time of disposal, depreciation for the fraction of the year to the date of
disposal must be recorded. The carrying amount to be eliminated is determined by
debiting (decreasing) Accumulated Depreciated for the total depreciation to date and
crediting (decreasing) the asset account for the cost of the asset.

1. Accounting for Retirement of PPE

e.g. Tan Co. retires its computers which cost P40,000.00. The accumulated depreciation
on these printers is P40,000.00 The equipment, therefore, is fully depreciated (zero
carrying amount)
Accumulated Depreciation – Office Equipment -Computers 40,000.00
Office Equipment –Computers
40,000.00
(to record retirement of fully depreciated equipment
A = L + SE
+40,000
-40,000

If the asset is still useful to Tan Co. the asset and its accumulated depreciation continue to
be reported on the balance sheet without further depreciation adjustment until the
asset is retired. Reporting the asset and related accumulated depreciation on the
balance sheet informs the financial statement readers that the asset is still in use. Once
the asset is fully depreciated, even if it is still being used, no additional depreciation
should be taken. In no situation can be accumulated depreciation on a PPE asset
exceed its cost or revalued amount.

If an item of PPE is retired before it is fully depreciated, and no cash is received for scrap or
residual value, a loss on disposal occurs. E.G., assume that Tan Co. discards delivery
equipment that cost P350,000.00 and has accumulated depreciation of P300,000.00.

Accumulated Depreciation – Delivery equipment 300,000.00

Loss on Disposal
50,000.00
Delivery Equipment
350,000.00
(to record retirement of delivery equipment at a loss)
A = L + SE
+300,000.00 -50,000.00 Expense
-350,000.00

The loss on disposal is reported as an expense in the income statement

2. Sale of property, plant and equipment

In a disposal by sale, the carrying amount of the asset is compared with the net proceeds
received from the sale. If the net proceeds of the sale exceed the carrying amount of the
PPE asset, a gain on disposal occurs. If the net proceeds of the sale are less than the
carrying amount of the PPE asset sold, a loss on disposal occurs.

2.1. GAIN ON DISPOSAL/SALE

 Cost of office Furniture – P60,000.00
Date of Sale – January 1, 2007
Accumulated Depreciation as at June 30, 2006 - P41,000.00
Depreciation from July 1-December 31, 2006 – P8,000.00

1. To update depreciation:

Jan 1, 2007 – Depreciation P8,000.00

Accumulated Depreciation P8,000.00

2. To record sale of office furniture

Jan 1, 2007 - Cash P16,000.00

Accumulated depreciation 49,000.00
Office Furniture
60,000.00
Gain on disposal/sale of office furniture
5,000.00

Cost of office furniture

P60,000.00
Less: Accumulated Depreciation(P41,000+8,000)
49,000.00
Carrying amount at time of disposal
P11,000.00
Proceeds from sale
16,000.00
Gain on disposal P
5,000.00
Reported as income on the year of disposal

A = L +
OE
+16,000
-60,000
+49,000
+5,000 Income

2.2 LOSS ON DISPOSAL/SALE

If the furniture was sold at P9,000.00

Cost of office furniture

P60,000.00
Less: Accumulated Depreciation(P41,000+8,000)
49,000.00
Carrying amount at time of disposal
P11,000.00
Proceeds from sale
9,000.00
 Loss on disposal P
2,000.00
Reported as expense on the year of disposal

A = L +
OE
+9,000
-60,000
+49,000
-2,000 Expense

Summary:
Accumulat Depreciati
Equipmen Gain on Loss on
Transactions Cash edDepreci on
t Sale Sale
ation Expense
Dr Cr Dr Cr Dr Cr Dr Cr D Cr Dr Cr
r
Purchase of PPE X X
Recording X X
Depreciation
Sale of PPE for book X X X
value
Sale of PPE for more
than book value X X X X
Sale of PPE for less
than book Value X X X X