ACTBAS2 LECTURES, PROF. L.

LANDICHO, DLSU, 2ND TERM AY 2011-2012

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.

ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

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)

ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

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.

ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

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.

ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

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 ACT Land ImprovementsB 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 7
AY 2011-2012

ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

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 A C B A S 2 L E C U the P R O F L L A N D I such L S U , 2 N D recorded net of cashTdiscount,Tif R E S , seller. is. giving C H O , Ddiscount. T E R M 9
AY 2011-2012

CASH PURCHASE OF PROPERTY, PLANT & EQUIPMENT

ILLUSTRATION For example, Merchandise Traders purchased one IBM computer for P140, 000, cash basis. The entry to record the transaction is:

Office Equipment Cash

140 000 140 000

To record purchase of one IBM computer

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 ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM 10 AY 2011-2012

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.
ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

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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

ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

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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 Accounts Payable Cash

40,000 20,000 20,000

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

ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

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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 Accounts Payable

29,400

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 ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM Accounts Payable to be recorded P 29,400 14 AY 2011-2012

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 Cash Accounts payable

29,600 10,000 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.
ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

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COMPUTATION:
Invoice Price Less: Down payment Accounts Payable should be Less: Cash discount (20,000x2%) Accounts Payable to be recorded Add: Down payment Cost of Store Equipment to be recorded P 30,000 10,000 20,000 400 19,600 10,000 P 29,600

ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

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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.
ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

17

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)

ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

18

COMPUTATION:
List Price Less: Trade Discount (40,000 x 5%) Invoice Price Less: Down payment Accounts Payable should be Less: Cash discount (28,000 x 2%) Accounts Payable to be recorded Add: Down payment Cost of Furniture and Fixture to be recorded P40,000 2,000 38,000 10,000 28,000 560 27,440 10,000 P 37,440

ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

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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 ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM Cost of Furniture and Fixture to be recorded A Y 2 0 1P- 24,900 20 1 012

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.
ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

21

ILLUSTRATION :
Assume that on July 5, Merchandise Traders made a partial payment of P10,000. Entry to record the transaction is:

Jul. 5

Accounts Payable Cash

10,000
10,000

To record partial payment

ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

22

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
ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

23

ILLUSTRATION :
1) Assume on July 11, Merchandise Traders settled his account with Mansion, Inc. in full. The entry to record this transaction is:

Jul. 5

Accounts Payable Cash

12,540
12,540

To record full payment of account

Accounts Payable initially recorded Less: Return of one table Partial Payment Account to be paid

P 27,440 P 4,900 10,000 14,900 P 12,540

ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

24

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:

Jul. 5

Accounts Payable Discount Lost Cash

To record return full payment of account

12,540 460 13,000

ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

25

COMPUTATION:
Accounts Payable initially recorded Less: Return of one table P 4,900 Partial Payment 10,000 Accounts Payable balance in books of buyer 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% Cash to be paid by buyer P 27,440

14,900 P 12,540

460 P 13,000

ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

26

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

ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

27

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 Cash Accounts Payable Delivery Equipment Cash

937,000 300,000 637,000 3,000 3,000

To record purchase of delivery van. Terms: with down, balance, 2/10, n/30 July 20

To record freight cost of purchased van

ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

28

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 A C T B A S 2 gain on ,the F . L . L A N D I C H O , D L S U , 2 N D T sale. L E C T U R E S P R O sale or a loss on the E R M
AY 2011-2012

29

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.

ACTBAS2 LECTURES, PROF. L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

30

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

The entry to record the transaction is:

July 25

Cash Accumulated depreciation-Office Equipment Office Equipment

To record sales of old typewriter

8,000 12,000
20,000

Acquisition cost Less: Accumulated depreciation Net Book value Resale price ACTBAS2 LECTURES, PROF. No gain or loss

L. LANDICHO,

P 20,000 12,000 8,000 8,000 DLSU, 2ND TERM A Y 2-0-__ 0 1 2 011-2

31

CASE 2: ASSUME THAT THE TYPEWRITER WAS SOLD AT P10,000.

The entry to record the transaction is:

July 25

Cash Accumulated depreciation-Office Equipment Office Equipment Gain on sale of Office Equipment
To record sales of old typewriter

10,000 12,000
20,000 2,000

Resale Price Less: Net Book Value 20,000 Acquisition Cost 12,000 Less: Accumulated Depreciation ACTBAS2 LECTURES, PROF. L. LANDICHO, Gain on sale of office equipment

P 10,000 8,000 P 2,000 32

DLSU, 2ND TERM AY 2011-2012

CASE 3: ASSUME THAT THE TYPEWRITER WAS SOLD AT P7,000.

The entry to record the transaction is:

July 25

Cash Accumulated Depreciation-Office Equipment Loss on sale of Office Equipment Office Equipment
To record sales of old typewriter

7,000 12,000 1,000 20,000

Resale Price Less: Net Book Value Acquisition Cost Less: Accumulated Depreciation ACTBAS2 LECTURES, PROF. Loss on sale of office equipment

P 7,000 20,000 12,000

L. LANDICHO, DLSU, 2ND TERM AY 2011-2012

8,000 33 (P 1,000)