10. Accounting for PPE

A C T B A S 2 L E C T U R E S , P R O F . L . L A N D I C H O , D L S U , 2 N D T E R M

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PROPERTY, PLANT AND EQUIPMENT

These are assets used in the operation of business and often constitute the largest

single asset category of a firm.

For accounting purposes, these so called plant assets or tangible assets are grouped

into three sub classifications:

A. Assets subject to depreciation, e.g., buildings, equipment, etc.

B. Assets subject to depletion, e.g., mineral deposits, timber tracts, etc.

C. and, which is not subject to depreciation or depletion.


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NATURE OF PROPERTY, PLANT & EQUIPMENT

The term plant, property and equipment is used to describe long lived assets that

meet the following criteria:

1. They must possess physical existence;

2. They must be more or less permanent in nature;

3. They must not be held for sale;

4. They must be intended for use in operations; and

5. They must undergo depreciation (except land)


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KINDS OF EXPENDITURES

Expenditures related to the acquisition and use of operational assets is either capital

expenditures or revenue expenditures. The charge to an expense account is

based on the assumption that the benefits from the expenditure will be used up

in the current period, and the cost should therefore be deducted from the

revenue of the period in determining the net income.

a. Capital Expenditure - Expenditures for the purchase or expansion of plant assets

are called capital expenditures and are recorded as asset accounts.

b. Revenue Expenditure - Expenditures for ordinary repairs, maintenance, fuel and

other items necessary to the ownership and use of plant and equipment are

called revenue expenditures and are recorded by debiting expense accounts.


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TERMS OF PAYMENT

Purchase of land will cause an increase in assets and the

corresponding credit varies depending on the terms under which

the purchase was made. The purchase may be on

Cash basis,

On credit terms,

On credit terms with down payment, or

By signing a mortgage contract for the plant assets.


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PRO-FORMA ENTRY

Land XXXX

Cash or Mortgage Payable XXXX

To record purchase of land to be used in the business operation

Land Improvements

Improvements to real estate such as driveways, fences, parking lots,

etc. have limited life and are therefore subject to depreciation. For

this reason, they should be recorded in separate account called

Land Improvements A C T B A S 2 L E C T U R E S , P R O F . L . L A N D I C H O , D L S U , 2 N D T E R M

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NATURE OF DEPRECIABLE ASSETS

All assets except land decline in usefulness as

they age. These depreciable assets are of useful

to the company for only a limited number of

years.

Depreciation, is the allocation of the cost of a

plant asset to expense in the periods in which

services are received from the asset.

Rule on Acquisition

When property, furniture or equipment is acquired, the purchase may be made

on cash basis, on credit terms with down payment, or by issuing a promissory

note. If the purchase is made under credit terms, the said purchase must be

recorded net of cash discount, if the seller is giving such discount. A C T B A S 2 L E C T U R E S , P R O F . L . L A N D I C H O , D L S U , 2 N D T E R M

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CASH PURCHASE OF PROPERTY, PLANT & EQUIPMENT

Effect of cash purchase:

When property, furniture or equipment is acquired by cash purchase,

there is an increase in the asset property and equipment and a

decrease in the asset cash

ILLUSTRATION

For example, Merchandise Traders purchased one IBM computer

for P140, 000, cash basis. The entry to record the transaction is:

Office Equipment 140 000

Cash 140 000 To record purchase of one IBM computer


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A purchase on credit terms of any type of plant assets will either require a down payment or purely on account basis. At the same time, the seller may or may not give a cash discount.


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1) PURELY CREDIT WITHOUT CASH DISCOUNT

Office Equipment 140 000

Accounts payable 140 000 To record purchase of one IBM computer


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2) WITH DOWN PAYMENT WITHOUT CASH DISCOUNT

Credit purchase with down payment but without any discounts given will be

recorded by using the following entry:

Office equipment 40,000

Accounts Payable 20,000

Cash 20,000 To record purchase of IBM computer. Terms: with 50% down, balance on account.


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3) CREDIT PURCHASE WITH CASH DISCOUNT

When a credit purchase is with a cash discount, the property acquired

must be recorded net of cash discount.

To illustrate, Merchandise Traders purchased a cash register from

Omron Marketing for P30,000. Terms: 2/10, n/30. The entry to record

the transaction is:

Store Equipment 29,400

Accounts Payable 29,400 To record purchase of cash register. Terms: 2/10, n/30

Since there was a cash discount given by the seller, the applicable

amount should be deducted from the liability to be recorded.

Invoice Price P 30,000

Less: 2% cash discount (30,000*2%) 600

Accounts Payable to be recorded P 29,400 A C T B A S 2 L E C T U R E S , P R O F . L . L A N D I C H O , D L S U , 2 N D T E R M

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4) DOWN PAYMENT AND CASH DISCOUNT

Recording net of cash discount will also be applied under credit purchase with down payment

and cash discount.

Illustration:

Merchandise Traders purchased a cash register from OMRON Marketing for P30,000. Terms:

P10,000 down payment; balance, 2/10, n/30. The entry to record the transaction is:

Store Equipment 29,600

Cash 10,000

Accounts payable 19,600 To record purchase of cash register. Terms: with down; balance, 2/10, n/30.

Since the down payment is not to be subjected to the cash

discount, only the liability portion must be recorded at an

amount net of cash discount.


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COMPUTATION:

Invoice Price P 30,000

Less: Down payment 10,000

Accounts Payable should be 20,000

Less: Cash discount (20,000x2%) 400

Accounts Payable to be recorded 19,600

Add: Down payment 10,000

Cost of Store Equipment to be recorded P 29,600


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When property, furniture or equipment purchased turns out to be defective, damaged, or of the wrong specification, the buyer either

1)returns the asset bought or

2)bargains for a reduction in the acquisition cost of such asset.


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ILLUSTRATION:

1) Assume that on July 1, Merchandise Traders purchased store shelves

and cabinets from Mansion Inc. for P40,000 less 5. Terms: P10,000

down; balance; 2/10, n/30. The entry to record the transaction is:

Jul. 1 Store Furniture and Fixture 37,440

Cash 10,000

Accounts Payable 27,440 To record purchase of cabinet and shelves,

(10,000 down, balance 2/10, n/30)


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COMPUTATION:

List Price P40,000

Less: Trade Discount (40,000 x 5%) 2,000

Invoice Price 38,000

Less: Down payment 10,000

Accounts Payable should be 28,000

Less: Cash discount (28,000 x 2%) 560

Accounts Payable to be recorded 27,440

Add: Down payment 10,000

Cost of Furniture and Fixture to be recorded P 37,440


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ILLUSTRATION:

If one of the shelves is subsequently returned by Merchandise Traders to Mansion, Inc.

because of some defects, there will be a decrease in liability and also a decrease in

the asset.

2) Assume that on July 3, Merchandise Traders returned one of the cabinets worth P5,000

due to some major defects. The entry to record the transaction is:

Jul. 3 Accounts Payable 4,900

Store Furniture and Fixture 4,900 To record return of one cabinet

Subsequent returns made by the buyer will also be recorded as net of cash discount.

Amount of returned Asset P 5,000

Less: Applicable Cash Discount (5,000 x 2%) 100

Cost of Furniture and Fixture to be recorded P 4,900 A C T B A S 2 L E C T U R E S , P R O F . L . L A N D I C H O , D L S U , 2 N D T E R M

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The buyer has the option to make a partial payment of his account to decrease the amount of his liability prior to his full payment. Partial payment will reduce liability and the asset cash.


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ILLUSTRATION :

Assume that on July 5, Merchandise Traders made a partial

payment of P10,000.

Entry to record the transaction is:


Cash 10,000 To record partial payment


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The buyer can pay his outstanding account within or after the discount period. If full settlement is made within the discount period, the entry will only reflect a decrease in liability and cash


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ILLUSTRATION :

1) Assume on July 11, Merchandise Traders settled his account with

Mansion, Inc. in full. The entry to record this transaction is:


Cash 12,540 To record full payment of account

Accounts Payable initially recorded P 27,440 Less: Return of one table P 4,900 Partial Payment 10,000 14,900 Account to be paid P 12,540


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ILLUSTRATION :

2) Assume that instead of paying on July 11, Merchandise Traders paid

his account in full with Mansion, Inc. on July 20.

The entry to record the transaction is:


Discount Lost 460

Cash 13,000 To record return full payment of account


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COMPUTATION:

Accounts Payable initially recorded P 27,440

Less: Return of one table P 4,900

Partial Payment 10,000 14,900

Accounts Payable balance in books of buyer P 12,540

Add: Discount lost due to paying after discount period

Original amount of Accounts Payable P 28,000

Less Actual Amount of Return 5,000

Basis for computing cash discount 23,000

X Cash discount percentage 2% 460

Cash to be paid by buyer P 13,000


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RECORDING INCIDENTAL CHARGES

Additional expenditures for freight, insurance while asset is in

transit, brokerage fees, arrastre, handling, storage, customs

duties, test runs, installation costs, etc are usually paid by the

buyer and are necessary in order to put the property in a place

and condition ready for use.

These expenditures become part of the cost of acquiring the

property, furniture or equipment.

Incidental charges are capitalized, i.e., Debited to the asset account

and not to an expense account


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ILLUSTRATION:

1) Assume that on July 20, 20X1, Merchandise Traders bought a delivery van

from Toyota, Inc., Japan for P950,000. Terms: P300,000 down payment;

balance, 2/10, n/30. F.O.B. shipping point, collect P3,000. The entries to

record the transaction are:

July 20 Delivery Equipment 937,000

Cash 300,000

Accounts Payable 637,000 To record purchase of delivery van. Terms: with down, balance, 2/10, n/30

July 20 Delivery Equipment 3,000

Cash 3,000 To record freight cost of purchased van


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Assets may eventually be sold when they

become worn out or obsolete. The

proceeds of the sale will be used to

replace old units with new units.

Disposal of property and equipment could be

for an amount just sufficient to recover the

book value of the asset at the date of sale

or for an amount, which results in either a

gain on the sale or a loss on the sale. A C T B A S 2 L E C T U R E S , P R O F . L . L A N D I C H O , D L S U , 2 N D T E R M

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ILLUSTRATION

Assume that on July 25, Merchandise

Traders sold its old typewriter being used

in the office. The said asset was

acquired at P20,000 with an

accumulated depreciation to date

amounting to P12,000.


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CASE 1: ASSUME THAT THE TYPEWRITER WAS SOLD AT P8,000.


July 25 Cash 8,000

Accumulated depreciation-Office Equipment 12,000

Office Equipment 20,000 To record sales of old typewriter

Acquisition cost P 20,000 Less: Accumulated depreciation 12,000 Net Book value 8,000 Resale price 8,000 No gain or loss -0-__


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July 25 Cash 10,000

Accumulated depreciation-Office Equipment 12,000

Office Equipment 20,000

Gain on sale of Office Equipment 2,000 To record sales of old typewriter

Resale Price P 10,000

Less: Net Book Value 20,000

Acquisition Cost 12,000

Less: Accumulated Depreciation 8,000

Gain on sale of office equipment P 2,000 A C T B A S 2 L E C T U R E S , P R O F . L . L A N D I C H O , D L S U , 2 N D T E R M

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July 25 Cash 7,000

Accumulated Depreciation-Office Equipment 12,000

Loss on sale of Office Equipment 1,000

Office Equipment 20,000 To record sales of old typewriter

Resale Price P 7,000

Less: Net Book Value 20,000

Acquisition Cost 12,000

Less: Accumulated Depreciation 8,000

Loss on sale of office equipment (P 1,000) A C T B A S 2 L E C T U R E S , P R O F . L . L A N D I C H O , D L S U , 2 N D T E R M

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10. Accounting for PPE

Documents

merchandise

accounts payable

cash accumulated

payment accounts

accounts payable

cash discount

cash register

cash basis