Property, plant and equipment

Topic Problems
Capitalizable costs 19-3
Acquisition 19-7
Subsequent expenditures 19-14
Borrowing cost 19-18
Depreciation 19-35
Government Grants 19-40

Problem 19-3

Scenario: Old building is usable but likely to be demolished right away

Purchase price AND common costs- allocate to land and building using relative FV, the allocated cost of
the building is charged to loss
Net demolition costs- New building

CASE 1 Land Old building New building Land Impr.

Purchase price 8,750,000 1,250,000
1 12,250 1,750
2 17,500 2,500
3 12,000
4 9,625 1,375
5 20,125 2,875
6 35,000 5,000
7 2,625 375
8 11,000
9 70,000
10 60,000
11 50,000
12 600,000
13 30,000
14
15 8,750 1,250
16
17 50,000
18 220,000
19 11,000
20 35,000
21 9,800
22 33,000
23 (4,000)
Total 8,936,875 1,265,125 1,056,800 50,000
C B D B

Scenario: Old building is unusable and has minimal FV

Purchase price AND common costs- allocated and charged to land
Net demolition costs- new building
CASE 2
Total 10,202,000 0 1,056,800 50,000
B A D B

Problem 19-7

Deferred Settlement Terms. The cost of the asset is equal to the:

a) Cash price is available - cash price or cash equivalent paid
Difference between cash price vs total payment is charged to interest expense unless
PAS 23, Borrowing Cost applies
b) No available cash price - PV of all payments using imputed interest rate

1
Cash price equivalent 800,000 A

2
Principal 1,000,000
Multiply by: PV of 1 using 12% rate 0.7972
Cost of the equipment 797,200 B

Problem 19-14
Motor Vehicle Machine Precision Machine Building
Beginning balance 790,000 1,900,000 600,000 4,100,000
March 2 45,000
June 1 130,000
June 30 60,000
Unloading and set up cost 48,000
Extends life of machine 60,000
Attic 500,000
Routine repairs
Total 850,000 2,005,000 648,000 4,730,000
C B C B
Rearrangement (relocation or reinstallation) cost - capitalized and amortized over the remaining life
of the asset to which it pertains
Part of the blueprint of the building - capitalized to Building
Extends useful life - cost makes the asset last longer, capitalized

Problem 19-18

Asset Financed by:

a) Specific Borrowing - amount eligible for capitalization is the actual borrowing costs less any investment
income on the temporary investment of those borrowings
b) General Borrowing - compute for the average borrowing cost by multiplying the capitalization rate to the
weighted average expenditures. Then, compare the average borrowing cost with the actual borrowing cost
and get the lower figure as the capitalizable borrowing cost.

1&2
January 1, 2020 200,000 12/12 200,000
September 1, 2020 300,000 4/12 100,000
December 31, 2020 300,000 0/12 -
Average accum. expenditures 300,000
Multiply by: Rate* 12%
Capitalizable borrowing cost 36,000
*Since the ave. accum. expenditure did not exceed the principal of the specific borrowing, the specific
rate was used in determining the capitalizable borrowing cost. Otherwise, use weighted ave. capitalization rate

3&4
Accum. expenditures, beg.
(800k + 36k)* 836,000 9/9 836,000
March 31, 2021 300,000 6/9 200,000
Sept 30, 2021 200,000 0/9 -
Average accum. expenditures 1,036,000
Less: Specific borrowing 750,000
Attributable to general borrowing 286,000
Multiply by: Rate 9%
Multiply by: Months outstanding 9/12
Capitalizable borrowing cost - general borrowings 19,305
Add: Specific borrowings (750k x 12% x 9/12) 67,500
Total capitalizable borrowing cost 86,805

*If the project was completed beyond one year, weighted average expenditures computation should consider that
at the beginning of the Year (e.g. second year), the expenditures will include the total amount of expenditures in the
previous year plus the capitalized borrowing cost in Year 1. The amount will be averaged from the start of the year up
to the date of completion
All other expenditures incurred during the year are averaged from the date of incurrence up to the end of construction
Problem 19-35
Case 1 Case 2
Cost 3,300,000 3,300,000
Less: Accum depreciation [(3.3M - 300k) / 8 x 4] 1,500,000 1,500,000
Carrying value, 12/31/20 1,800,000 1,800,000
Residual value 300,000 150,000
Depreciable amount 1,500,000 1,650,000
Divide by / Multiply by 2 4
Depreciation 2021 750,000 412,500
Carrying value, 12/31/21 1,050,000 1,387,500

Problem 19-40

Grants related to nondepreciable assets should be recognized in P&L over the periods that bear the cost
of meeting the obligations. As an example, a grant of land may be conditional upon the erection of a
building on the site and it may be appropriate to recognize the grant in P&L over the life of the building.

Presentation
Government grants related to assets, including non-monetary grants at FV, shall be presented in the SFP
either:
a) Deferred income (liability) or gross method - recognized in P&L on a systematic basis over the useful
life of the asset
b) Net method - deducting the grant in arriving at the carrying amount of the asset. The grant is recognized in P&L
over the life of a depreciable asset as a reduced depreciation expense.
Depreciable amount = cost less salvage value less government grant

1
Total FV of the land 5,000,000
Divide by useful life of the building 10
Income from government grant 500,000 B

2
Cost of the factory building 20,000,000
Divide by useful life of the building 10
Depreciation 2,000,000 C

3
Cost of the factory building 20,000,000
Less: Government grant 5,000,000
Total 15,000,000
Divide by useful life of the building 10
Depreciation 1,500,000 D

4
Cost of the factory building 20,000,000
Less: Depreciation 2,000,000
Carrying amount, 12/31/2021 18,000,000 A

5
Net cost of factory building 15,000,000
Less: Depreciation 1,500,000
Carrying amount, 12/31/2021 13,500,000 B
allocated cost of

Others Allocation
Land 7,000,000 87.50%
Old building 1,000,000 12.50%
Total 8,000,000 100.00%

40,000

23,500

63,500
 63,500

Expense

26,000
26,000
D
remaining life

ess any investment

pitalization rate to the

actual borrowing cost
 A

D
ng, the specific
d ave. capitalization rate

utation should consider that

amount of expenditures in the
ed from the start of the year up

ce up to the end of construction

Case 3
3,300,000
1,500,000
1,800,000
300,000
1,500,000
4/10 4
600,000 3
1,200,000 2
1
10 SYD Denominator

that bear the cost

e erection of a
ife of the building.

esented in the SFP

sis over the useful

he grant is recognized in P&L