Pdfcoffee - Management of net working capital involves regulating the various types of current PDF

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PROPERTY, PLANT AND EQUIPMENT (PPE) Tangible asset – with physical substance Used in production Used over a period of one year MeasurementInitial – Cost - Cash/ Cash Equivalent Cash + FV of Asset Given Subsequent a. Cost model = Cost - (Accumulated Depreciation) – (Impairment) b. Revaluation Model =...

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PROPERTY, PLANT AND EQUIPMENT (PPE) - Tangible asset – with physical substance - Used in production - Used over a period of one year Measurement Initial – Cost - Cash/ Cash Equivalent - Cash + FV of Asset Given Subsequent a. Cost model = Cost - (Accumulated Depreciation) – (Impairment) b. Revaluation Model = Revalued Amount – (Accumulated Depreciation) – (Impairment) Cost a. Purchase Price b. Cost Directly Attributable c. Initial Dismantling Cost (if the company will be the one to pay) Acquisition a. Cash Payment b. On Account subject to Discount - Discount, whether taken or not are deducted c. Installment Basis -Cash Price Equivalent if cash price equivalent is not available, Noninterest Bearing Note – down payment + present value d. Issuance of shares 1. FV of asset received 2. FV of shared given 3. Par value of shares given e. Bonds 1. FV of bonds 2. FV of asset given 3. Face of Bonds

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f. Exchange: Considerations - Commercial Substance - Fair Value - Cash Payment  Commercial Substance – recognize gain or loss  Noncommercial Substance –measured at carrying amount g. Donation Shareholder – donated capital – shared premium – additional trade in capital Non-shareholder – depends on the agreement – income if there is a condition, deferred  Asset is recorder at Fair Value h. Construction  direct materials - used to construct  direct labor – ones who construct  indirect cost and incremental (overhead) 

Intervening Operations – Expense

Derecognition Accumulated Depreciation Asset 

xx xx

at cost or depreciated amount

Fully Depreciated – depends on the management - disclose Property Held for Sale Current Asset – derecognize Property held for sale Accumulated depreciation Asset(Cost)

xx xx xx

Abandoned – don’t derecognize Illustration Glitter Company acquired the following plant assets during the current year:

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Equipment- Acquired at an invoice price of P600,000, subject to a 5% cash discount which was not taken. Land- acquired by making down payment of P400,000 and issuing note payable for P1,800,000. A payment of P600,000 is to be made at the end of each year for three years. The applicable rate of interest is 8%. The present value of ordinary annuity of 1 at 8% for three periods is 2.58. shipping charge for the equipment of P200,000 and installation cost of P350,000 were incurred. Machinery- acquired and paid in full by issuing P600,000 of 10% bonds payable and 40,000 shares with par value of P10. The share was selling at P19 and the bonds were trading at P102. Inventory- acquired by paying P400,000 and trading an old inventory with a carrying amount of P2,000,000 and a fair value of P2,100,000. The new inventory has a fair value of 2,500,000. Required: 1. Determine 2. Determine 3. Determine 4. Determine exchange?

the the the the

cost of the equipment? capitalizable cost of the land? initial cost of the Machinery? initial measurement of the new inventory received in

Computation: 1. Invoice Price Less: Discount (600,000 x 5%) Cost of Equipment

600,000 (30,000) 570,000

2. Down payment FV of future payments (600,000 x 2.58) Shipping charges Installation cost Cost of Land

400,000 1,548,000 200,000 350,000 2,498,000

3. Fair value of the bonds payable (600,000 x 1.02) Fair value of shares (40,000 x 19) Cost of Machinery

612,000 760,000 1,372,000

4. Fair value of asset given Cash payment Cost of new inventory

2,100,00 400,000 2,500,00

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GOVERNMENT GRANT -

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assistance from the government in the form of transfer of resources to an entity by the government in the form of transfer of resourced to an entity in return for part or future compliance with certain conditions relating to the operating activities of the entity. (PAS 20, paragraph 3) Sometimes called subsidy, subvention or premium Shall be provided by the government

Classification a. Grant related to asset b. Grant related to income Accounting for Government Grant  Grant is taken to income over one or more periods in which the related cost is incurred - Grant in recognition of specific expense shall be recognized as income over the period of the related expense - Grant related to depreciable asset requiring fulfillment of certain conditions shall be recognized as income over the periods and in proportion to the depreciation of the related asset. - Grant related to nondepreciable asset requiring fulfillment of certain conditions shall be recognized as income over the periods which bear the cost of meeting the conditions. - A government grant that becomes receivable as compensation for expenses or loses already incurred or for the purpose of giving immediate financial support to the entity with no further related costs shall be recognized as income of the period in which it becomes receivable. Two Approaches in Recording Government Grant a. Deferred Income Approach b. Deduction from Asset Approach Repayment on Government Grant -

Repayment of a grant related to income shall be applied first to unamortized deferred income and any excess shall be recognized immediately as expense 4

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Repayment to grant related to an asset shall be recorded by increasing the carrying amount of the asset

Illustration On January 1, Easy Company received a grant of P 1, 500, 000 from the government to subsidize tuition fees for a period of 5 years. On January 1, 2017, the entity violated certain conditions attached to the grant, and therefore had to repay fully such grant to the government. Required: 1. Determine the grant income for 2015? 2. Determine the amount to be recognizes as loss resulting from the repayment of the grant in 2017? Computation: 1. Grant income for 2015 (1,500,000/5 years)

300, 000

2. Total grant received 1,500,000 Income recognized in 2015 and 2016 (1,500,000/5 x 2) (600,000) Deferred Grant Income- December 31, 2016 900,000

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BORROWING COST -

interest and other costs that an entity incurs in connection with borrowing funds (PAS 23, paragraph 25)

Accounting for Borrowing Cost (PAS 23) 1. If it is directly attributable to the acquisition, construction or production of a qualifying asset, the borrowing cost is required to be capitalized as cost of the asset. 2. All other borrowing cost shall be expensed when incurred Specific Borrowing – actual borrowing cost less any investment income – A portion is used for working capital, treated as a general borrowing General Borrowing – equal to the average expenditures of the asset multiplied by a capitalization rate – Capitalization rate (total annual borrowing cost/total general borrowing) Commencement of Capitalization a) When the entity incurs expenditures for the asset b) When the entity incurs borrowing cost c) When the entity undertakes activities that are necessary to prepare the asset for the intended use or sale Suspension of Capitalization  Capitalization shall be suspended during extended periods in which active development is interrupted. Cessation of Capitalization 6

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when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete

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when the physical construction of asset is complete even though routine administrative work might still continue.

Illustration Innuendo Company has the following loans outstanding for the entire year 2016. Specific construction loan General loan

1,000,000 20,000,000

10% 12%

The entity began self-construction of a building on January 1, 2016 and the building was completed on December 31, 2015. The following expenditures were made during the current year: January 1 July 1 November 1 Total

1,000,000 2,000,000 3,000,000 6,000,000

Required: Determine the cost of the new building Computation: Date January 1 July 1 November 1 Total

Expenditures Fraction 1,000,000 12/12 2,000,000 6/12 3,000,000 2/12

Average 1,000,000 1,000,000 500,000 2,500,000

Average expenditures Applicable to Specific loan Applicable to General loan

2,500,000 (1,000,000) 1,500,000

Actual Expenditures Capitalizable interest Specific (1,000,00 x 10%) General (1,500,000 x 12%) Total cost of new building

6,000,000 100,000 180,000

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280,000 6, 280,000

LAND AND BUILDING Capitalized Cost of Land a. Purchase price b. Legal fees and other expenditures for establishing clean title c. Broker commission d. Escrow fees e. Fees for registration and transfer of title f. Cost of relocation or reconstruction of property belonging to others in order to acquire possession g. Mortgages, encumbrances and interest on such mortgages assumed by the buyer h. Unpaid taxes up to date of acquisition assumed by the buyer i. Cost of survey j. Payments to tenants to induce them to vacate the land in order to prepare the land for the intended use but not to make room for the co nstruction of new building k. Cost of permanent improvements such as cost of clearing, cost of grading, leveling and landfill l. Cost of option to buy the acquired land  Land is not acquired – option – expensed Land Improvements

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Additions to cost not subject to depreciation – charged to land account

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If depreciable – charged to land improvements account

Cost of Building Acquired by Purchase a. Purchase price b. Legal fees incurred in connection with the purchase c. Unpaid taxes up to date of purchase d. Interest, liens and other encumbrances assumed by the buyer e. Payments to tenants to vacate the building f. Any renovating or remodeling cost incurred to put the building purchased in condition suitable for intended use Cost of Building When Constructed a. Materials used, labor employed and overhead directly attributable to construction b. Building permit or license c. Architect fee d. Superintendent fee e. Cost of excavation f. Cost of temporary building used as construction office and tools or material used g. Expenditures incurred during the construction period h. Expenditures for service equipment and fixtures made a permanent part of structure i. Cost of temporary safety fence around construction site and cost of subsequent removal thereof  Construction of safety fence after completion of building – land improvement

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j. Safety inspection fee Sidewalks, Pavements and Parking Lots a. Part of the blueprint – charged to building account b. Incurred not in connection with the construction of building – land improvements Damages when No Insurance is taken  Premium – charged to building account  No insurance is taken and damages are paid – expense/loss on damages PIC Interpretations 1. Land and old building purchased as single cost a. Building is usable, cost is allocated to land and building b. Building is not usable, allocated to land only 2. Old building is demolished immediately to make room for construction of new building a. Carrying amount of usable old building – recognized as loss – if new building is PPE or investment property b. Carrying amount of usable old building – capitalized – if new building is inventory c. Demolition cost minus salvage value – capitalized cost of the building whether new building is PPE, investment property or inventory d. Net demolition cost – capitalized cost of land if the old building is demolished to prepare the land for its intended use and not to make room for construction 3. Building is acquired and used in prior period but demolished in the current period to make room for construction of new building a. Carrying amount of old building – recognized as loss whether new building is PPE, inventory or investment property b. Net demolition cost – capitalized whether new building is PPE, inventory or investment property 10

c. Old building is subject to contract lease – payments to tenant to vacate old building – charged to building account

Illustration Purchase price of land and an old apartment building (fair value of building 200,000) Legal fees, including fee for title search Payment of land mortgage and related interest due at a time of sale Payment of delinquent property taxes Cost of razing the apartment building Grading and drainage on land site Architect fee on new building Payment to building contractor Interest cost on specific borrowing during construction Payment of medical bills of employees accidentally injured while inspecting building construction Cost of paving driveway and parking lot Cost of trees, shrubs and other landscaping Cost of installing light parking lot Premium for insurance on building during construction Cost of open house party to celebrate opening of building

2,000,000 10,000 50,000 20,000 30,000 15,000 200,000 8,000,000 300,000 10,000 40,000 55,000 5,000 25,000 60,000

Required: 1. Determine the cost of land 2. Determine the cost of new building 3. Determine the cost of land improvement Computation: 1. Cost of Land excluding fair value of old building Legal fees Grading and drainage on land site Payment of mortgage Payment of taxes Cost of razing the apartment building Cost of Land 2. Payment of delinquent property taxes assumed Architect fee on new building Interest cost on specific borrowing during construction Premium for insurance on building during construction 11

1,800,00 10,000 15,000 50,000 20,000 30,000 1,925,000 8,000,000 200,000 300,000 25,000

Cost of Building

8,525,000

3. Cost of paving driveway and parking lot Cost of trees, shrubs and other landscaping Cost of installing lights in parking lot Cost of Land Improvement

40,000 55,000 5,000 100,000

MACHINERY Capitalized Cost a. b. c. d. e. f.

g. h. i.

Purchase price Freight, handling, storage and other cost related to the acquisition Insurance while in transit Installation cost, including site preparation and assembling Cost of testing and trial run, and other cost necessary in preparing the machinery for use Initial estimate of dismantling and removing the machinery and restoring the site on which it is located, for which the entity has a present obligation Fee paid to consultants for advice on the acquisition of the machinery Cost of safety rail surrounding the machine Cost of water device to keep machine cool

 VAT – not capitalized – charged to input tax to be offset against output tax (VAT registered) Subsequent Cost -

Will increase the future service potential – capitalized Will merely maintain the existing level – expensed

 Additions – capitalized  Improvements and Betterments – capitalized  Repairs  Extraordinary repairs – capitalized  Ordinary repairs – expensed  Rearrangement Cost – capitalized Major Replacement  Separate identification is practicable, debited to asset account

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 Cost of part eliminated and related accumulated depreciation are removed and the carrying amount is treated as loss.  Separate identification is not practicable, replacement cost – discounted

Illustration Reverend Company acquired a machine at the beginning of current year: Cash paid for machine, including VAT of P96,000 Cost of transporting machine Labor cost of installation by expert filter Labor cost of testing machine Insurance cost for the current year Cost of training for personnel who will use the machine Cost of safety rails and platform surrounding machine Cost of water device to keep machine cool Cost of adjustment to machine to make it operate more efficiently Estimated dismantling cost to be incurred as required by contract

896,000 30,000 50,000 40,000 15,000 25,000 60,000 80,000 75,000 65,000

Required: Determine capitalizable cost of the machine? Computation: Cash paid for machine (896,000-96,000) Cost of transporting machine Labor cost of installation by expert filter Labor cost of testing machine Cost of safety rails and platform surrounding machine Cost of water device to keep machine cool Cost of adjustment to machine to make it operate more efficiently Estimated dismantling cost to be incurred as required by contract Total cost of machine

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800,000 30,000 50,000 40,000 60,000 80,000 75,000 65,000 1,200,000

DEPRECIATION -

Systematic allocation of the depreciable amount of the PPE

Depreciation Period  When Asset is available for use  Depreciation will cease when asset is derecognized  Depreciation will discontinue when the asset is classified as held for sale Two Kinds 1. Physical Depreciation - wear and tear and deterioration over a period 2. Functional or Economic Depreciation a) Inadequacy b) Supersession c) Obsolescence Three Factors of Depreciation a. Depreciable Amount b. Residual Value c. Useful life Factors in Determining Useful Life a) Expected usage of asset b) Expected physical wear and tear c) Technical obsolescence Methods of Depreciation 1. Equal Uniform Charge Method a. Straight Line Method Annual Depreciation =

Cost−Residual Value Life ∈Years

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b. Composite Method Composite Life =

Composite Rate =

Total Depreciable Amount Total Annual Depreciation Total Annual D epreciation Total Cost

c. Group Method - all assets are similar in nature and in estimated useful life are grouped and treated as a single unit 2. Variable Charge Method a. Service Hours Method Total Depreciable Amount Estimated Usefullife(Service hours)

Depreciation Rate per Hour =

Annual Depreciation = actual hours worked x rate per hour b.

Output or Production Method Total De preciable Amount Estimated Usefullife(Units of Output)

Depreciation Rate per Unit =

Annual Depreciation = yearly output x rate per unit 3. Decreasing charge/ Accelerated/Diminishing Balance Method a. Sum of Years’ Digit Sum of Years’ Digit =

Life(

Sum of Half Years’ Digit =

Life+1 ) 2

Life x 2[

b. Declining Balance Method

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( Life x 2 ) + 1 ] 2

Rate =

1−

√Residual Value ÷Cost

useful life

 residual value is ignored in getting depreciable amount c. Double Declining Balance Method Rate = 100%/Useful Life x 2  residual value is ignored in getting depreciable amount 3. Other Methods a. Inventory Method  the difference between the balance of the asset account and the value at the end of the year is recognized as depreciation for the year b. Retirement Method -

no depreciation recorded until the asset is retired

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depreciation is equal to the original cost of the asset retired minus salvage proceeds

Replacement Method - no depreciation is recorded until the asset is retired and replaced - depreciation is equal to the replacement cost of the asset retired less salvage proceeds

Illustration 1 Amicable company purchased a machine at a cost of P635,000 on January 1, 2016. It was estimated that the machine would have a residual value of P35,000. The estimated useful life is 5 years, 60 000 service hours and 150,000 production units. Actual Operations 2016 2017 2018 2019 2020

Service hours 14,000 13,000 10,000 11,000 12,000 60,000

Required: 16

Unit produced 34,000 32,000 25,000 29,000 30,000 150,000

1. Determine the depreciation expense and carrying amount using Straight line method for 2016 2. Determine the depreciation expense and carrying amount using Working hours method for 2017 3. Determine the depreciation expense and carrying amount using Production method for 2018 4. Determine the depreciation expense and carrying amount using Sum of year’s dig...