PPE – Depreciation and Derecognition 2019

LECTURE NOTES SUMMARY OF DEPRECIATION METHODS

Depreciation is the systematic allocation of the Uniform/Equal

depreciable amount of an asset over its useful life.
Straight line
Depreciable amount is the cost of an asset, or other Depreciable Amount (DA)/useful life
amount substituted for cost, less its residual value. Or DA x Depreciation rate (DR)
DR = 1/useful life
The residual value of an asset is the estimated amount
that an entity would currently obtain from disposal of Group/Composite
the asset, after deducting the estimated costs of
disposal, if the asset were already of the age and in Cost or balance x DR
the condition expected at the end of its useful life. DR = annual dep/total cost

Useful life is: Units of Production

(a) the period over which an asset is expected to be
available for use by an entity; or Output/Production

(b) the number of production or similar units expected Output x Depreciation rate
to be obtained from the asset by an entity. DR = DA/total est. output

Each part of an item of property, plant and equipment Working hours

with a cost that is significant in relation to the total Hours used x Depreciation rate
cost of the item shall be depreciated separately. DR = DA/total est. hours
The depreciable amount should be allocated on a Accelerated/Diminishing
systematic basis over the asset's useful life.
Sum of the years digits (SYD)
The residual value and the useful life of an asset
should be reviewed at least at each financial year-end DA x Fraction
and, if expectations differ from previous estimates, any SYD = [(life+1)/2] x life
change is accounted for prospectively as a change in
estimate under PAS 8. Declining
The depreciation method used should reflect the
Previous CA x Depreciation rate
pattern in which the asset's economic benefits are
consumed by the enterprise.
Regular = 1 – [nth root of (RV/Cost)]
150% = (1/UL) x 1.5
The depreciation method should be reviewed at least
200% = (1/UL) x 2
annually and, if the pattern of consumption of benefits
has changed, the depreciation method should be
Other Methods
changed prospectively as a change in estimate under
PAS 8.
Retirement
Cost of assets retired – Proceeds from retirement
Depreciation should be charged to the income
statement, unless it is included in the carrying amount
Replacement
of another asset.
Replacement cost of assets retired – Proceeds from
retirement
Depreciation begins when the asset is available for use
and continues until the asset is derecognized, even if it
Inventory
is idle.
Recorded balance of assets – Value at period end

Derecognition (Retirements and Disposals)

An asset should be removed from the balance sheet on
disposal or when it is withdrawn from use and no
future economic benefits are expected from its
disposal. The gain or loss on disposal is the difference
between the proceeds and the carrying amount and
should be recognized in the income statement.

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 PPE – Depreciation and Derecognition 2019
Problems
1. The Seoul Company purchased an office equipment
with a useful life of 10 years on 1 January 2019 for
P6,500,000.
At its year end of 31 December 2019, the amount
the company would receive from the disposal of the
asset if it was already of the age and in the
condition expected at the end of its useful life was
estimated at P700,000. Inclusive of inflation the
actual amount expected to be received on disposal
was estimated at P900,000.
What should be the depreciation charge for the year
ended 31 December 2019?
2. On January 1, 2017, Paete Company signed a 12-
year lease for a building. Paete has an option to
renew the lease for an additional 8-year period on
or before January 1, 2021. During January 2019,
Paete made substantial improvements to the
building. The cost of the improvements was
P3,600,000, with an estimated useful life of 15
years. At December 31, 2019, Paete intended to
exercise the renewal option. Paete has taken a full
year’s amortization on this improvement. What
should be the depreciation charge for the year
ended 31 December 2019?
3. Takatak, Inc., uses the group depreciation method
for its furniture account. The depreciation rate
used for furniture is 21%. The balance in the
furniture account on December 31, 2018, was
P125,000, and the balance in Accumulated
Depreciation - Furniture was P61,000. The
following purchases and dispositions of furniture
occurred in 2019 (assume that all purchases and
disposals occurred at the beginning of each year).
Assets Sold
Assets Purchased Cost Selling Price
P35,000 P27,000 P8,000
The carrying amount of furniture at December 31,
2019 is
4. Bongabon Corporation acquired a machine at a
total cost of P5,200,000. The estimated life of the
machine is 8 years or a total of 100,000 working
hours with no salvage value. The operating hours
of the machine totaled: 2018, 5,000 hours; 2019,
12,000 hours. The company follows the working
hours method of depreciation. On December 31,
2019, the carrying amount of the machine is
5. The Vientiane Company purchased a machine on 1
January 2018 for P81,000. The useful life of the
machine is estimated at 3 years with a residual
value at the end of this period of P6,000. During its
useful life, the expected units of production from the
machine are:
2018 12,000 units
2019 7,000 units
2020 5,000 units
What should be the depreciation expense for the
year ended 31 December 2019, using the most
appropriate depreciation method permitted by
PAS16 Property, plant and equipment?
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6. Blessing Corp. uses the sum-of-the-years’ digits
method to depreciate equipment purchased in
January 2017 for P20,000. The estimated residual
value of the equipment is P2,000 and the
estimated useful is four years. What should
Blessing report as the asset’s carrying amount as
of December 31, 2019?
7. Cuyapo Company purchased a machine in January
2, 2018, for P500,000. The machine has an
estimated useful life of five years and a salvage
value of P50,000. Depreciation was computed by
the 150% declining-balance method. The
accumulated depreciation balance at December 31,
2019, should be
8. Pantabangan Company takes a full year’s
depreciation in the year of an assets acquisition,
and no depreciation in the year of disposition.
Data relating to one depreciable asset acquired in
2017, with residual value of P900,000 and
estimated useful life of 8 years, at December 31,
2018 are:
Cost P9,900,000
Accumulated depreciation 3,750,000
Using the same depreciation method in 2017 and
2018, how much depreciation should Pantabangan
record in 2019 for this asset?
9. Roxanne Co. purchased equipment for P500,000.
The equipment had an estimated 10-year service
life. Roxanne’s policy for 10-year assets is to use
the 150% declining balance depreciation method
for the first five years of the asset’s life and then
switch to the straight-line depreciation method.
What amount should Roxanne report as
accumulated depreciation for equipment at the end
of the sixth year?
10. On March 31, 2019, Shooter Corp. retired a
machine used in manufacturing designer parts.
The machine was acquired May 1, 2009. Straight-
line depreciation method was used. The asset had
an estimated residual value of P20,000 and a five-
year life. On December 31, 2018, the balance in
the accumulated depreciation is P330,000. The
machine was scrapped and the company did not
receive a single consideration. The loss on
retirement is
11. Entity A acquired an asset that had a cost of
P130,000. The asset is being depreciated over a
5-year period using the sum-of-the-years’ digit
method. It has a salvage value estimated at
P10,000. The loss/gain if the asset is sold for
P38,000 at the end of the third year is
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 PPE – Depreciation and Derecognition 2019

Use the following information for the next two

questions.
Riles Truckers, Inc. acquired a heavy road transporter
on January 1, 2006 at a cost of P10 million. The
estimated useful life is 10 years. On January 1, 2019,
the power train requires replacement, as further
maintenance is uneconomical due to the off-road time
required. The remainder of the vehicle is perfectly
roadworthy and is expected to last for the next four
years. The cost of the new power train is P4.5 million.

12. Assuming that the original cost of the power train

is P3 million, the total depreciation expense in
2019 is

13. Assuming that the original cost of the power train

is not separately identifiable and the appropriate
discount rate is 5% (the present value of 1 at 5%
for 6 years is 0.7462), the total depreciation
expense in 2019 is

14. Bugis Corp. acquired a machine on January 1,

2004. Details of the machine at December 31,
2018 are given below:
Depreciation
Component Cost basis
Engine P170,000,000 Useful life of
40,000 hours
Outer casings 510,000,000 25 years
straight line
Other 12 years
components 255,000,000 straight line
P765,000,000
During the year 2019, the following events took
place:
a) Engine, which had run for 30,000 hours till
date developed serious snags. It was replaced
by a better engine with a cost of P238 million
and estimated life of 50,000 hours. The new
engine was used for 5,000 hours during the
year.
b) Polishing and painting was done to the outer
casings at a cost of P1.3 million.
c) Other components were upgraded at a cost of
P102 million. The remaining life of the other
components is 5 years.
Compute the total depreciation for the year 2019,
assume that all the work mentioned above was
completed at the beginning of 2019.

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