Background Property, plant and equipment 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: (Dyckman, T., Dukes, R., Davis, C., 1998).
• Assets subject to depreciation, e.g., buildings, equipment, etc. • Assets subject to depletion, e.g., mineral deposits, timber tracts, etc. • Land, which is not subject to depreciation or depletion.
Purpose The purpose of this section “Plant, Property and Equipment” is to illustrate how the acquisition and disposal of fixed assets may be recorded in the books of the
company.
Nature of Property, Plant & Equipment
The term plant, property and equipment is used to describe long lived assets that meet the following criteria: (Pefianco, E., Mercado, R., 1983)
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. must undergo depreciation (except land)
In this unit This unit contains the following topics:
Topics See Page
Kinds of Expenditures 2 of G
Purchase of Land 3 of G
Purchase of Property, Furniture or Equipment 4 of G Cash Purchase of Property, Plant & Equipment 5 of G Credit Purchase of Property, Plant & Equipment 6 of G Returns & Allowances on Plant Assets Acquired 8 of G Partial Payments on Plant Assets Acquired 10 of G Full Payment of Outstanding Liability 11 of G
Recording Incidental Charges 13 of G
Recording Sale of Property and Equipment 14 of G
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Kinds of Expenditures
Overview 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.
Capital
Expenditure Expenditures for the purchase or expansion of plant assets are called capital expenditures and are recorded as asset accounts.
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.
Exceptions to
the rule There are items on the other hand that businesses purchase which will benefit several accounting periods but whose amounts are relatively low, e.g.,
wastebaskets, pencil sharpeners, etc. These are not capitalized in order not to be burdened by the yearly computation of the assets’ depreciation. Thus, for reasons of convenience and economy, expenditures that are not material in peso amount are treated in accounting records as expenses of the current period. In short, any material expenditure that will benefit only the current period or that is not material in amount is treated as revenue expenditure.
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Purchase of Land
Overview Acquiring a piece of land which will be used as a site where an office
building or a factory may be constructed will be recorded in the books of the buyer as “Land” not to be subjected to depletion, i.e., the gradual decrease in the value of land due to mining or oil extraction purposes.
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.
Land is unique. Its cost is not depreciated/expensed overtime because its usefulness does not decrease like that of other assets.
Land xxxx
Cash or Mortgage Payable xxxx
Purchased 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
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Purchase of Property, Furniture or Equipment
Overview Every business organization would need different types of fixed assets to function efficiently and effectively. In this part, we shall be dealing on how to record acquisition of different properties of the firm, e.g., land, equipment, furniture and fixtures. We would also show how to record the eventual sale of this used plant assets.
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, as the term is used in accounting, is the allocation of the cost of
a plant asset to expense in the periods in which services are received from the asset. This is being done for the basic purpose of achieving the matching
principle, i.e., to offset the revenue of an accounting period with the cost of
goods and services being consumed in the effort to generate that revenue
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.
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Cash Purchase of Property, Plant & Equipment
Overview Plant assets may be acquired under different purchase terms. In the case of cash purchase, assets are acquired and fully paid on the date of acquisition.
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, Labrador Trading purchased one IBM computer for P40,000, cash basis. The entry to record the transaction is:
Office Equipment Cash
Purchased one IBM computer.
40,000
40,000
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Credit Purchase of Property, Plant & Equipment
Overview 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.
Purely credit without cash discount
Assuming the purchase made was purely on account basis without any discounts, this will cause an increase in asset and increase in liability. Office equipment
Accounts Payable
Purchased IBM computer on account.
40,000 40,000 With downpayment 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
Purchased IBM computer. Terms: with 50% down, balance on account.
40,000 20,000 20,000 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, Labrador Trading 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
Purchased cash register. Terms: 2/10, n/30
29,400
29,400 COMPUTATION: 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
=======
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Credit Purchase of Property, Plant & Equipment,
Continued
Downpayment and Cash discount
Recording net of cash discount will also be applied under credit purchase with down payment and cash discount.
To illustrate, Labrador Trading 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
Purchased cash register. Terms: with down; balance, 2/10, n/30.
29,600
10,000 19,600
COMPUTATION: 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.
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 =======
Reminder It is important to note that the computation started with invoice price, thus, trade discounts will be treated in the same way it was used in the purchase of merchandise.
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Returns and Allowances on Plant Assets Acquired
Overview When property, furniture or equipment purchased turns out to be defective, damaged, or of the wrong specification, the buyer either returns the asset bought or bargains for a reduction in the acquisition cost of such asset. When asset bought is returned, there is a decrease in asset and a decrease in liability, if the asset was originally acquired on credit terms. And the said reduction must also be recorded net of cash discount if there was a cash discount given in the term of purchase since returns and allowances are normally treated as part of the amount subjected to the cash discount. But when property is purchased on cash basis, allowance granted will be made by way of cash refunds. This will cause an increase in asset cash and a decrease in asset property.
Illustration Assume that on July 1, Labrador Trading 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 Cash
Accounts Payable
Purchased cabinet and shelves.
Terms: 10,000 down, balance 2/10, n/30.
37,440
10,000 27,440
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
P 40,000 2,000 38,000 10,000 28,000 560 27,440 10,000 P 37,440 ======== Continued on next page
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Returns and Allowances on Plant Assets Acquired,
Continued
Illustration,
con’t If one of the shelves is subsequently returned by Labrador to Mansion, Inc. because of some defects, there will be a decrease in liability and also a
decrease in the asset.
Assume that on July 3, Labrador returned one of the cabinets worth P5,000 due to some major defects. The entry to record the transaction is:
July 3 Accounts Payable
Store Furniture and Fixture Returned one cabinet.
4,900
4,900 COMPUTATION:
Since the original purchase was recorded net of cash discount, subsequent returns made by the buyer will also be recorded as net of cash discount.
Amount of returned asset
Less: Applicable cash discount(5,000 x 2%) Decrease in the liability of the buyer
P5,000 100 P4,900 =====
Defective items It is not uncommon for a seller to replace defective items sold with a new unit. When this happens, no entry need be made of the return.
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Partial Payments on Plant Assets Acquired
Overview 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 asset, cash.
Illustration Assume that on July 5, Labrador Trading made a partial payment of P10,000. The entry to record the transaction is:
July 5 Accounts Payable Cash
Made a partial payment.
10,000
10,000 Note: Partial payments, unlike returns, are not recorded net of cash discount since it will not affect computation of the discount account on the date payment is made. Partial payments on the other hand will reduce existing liability of the buyer.
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Full Payment of Outstanding Liability
Overview 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
Illustration Assume on July 11, Labrador Trading settled his account with Mansion, Inc. in full. The entry to record this transaction is:
July 11 Accounts Payable Cash
Full payment of account.
12,540
12,540 COMPUTATION:
Accounts Payable initially recorded Less: Return of one table
Partial Payment Account to be paid P 4,900 10,000 P 27,440 14,900 P 12,540 =======
Reminder It is important to note that the acquisition of property was recorded net of cash discount on the date asset was bought. Therefore, if the buyer pays his liability within the discount period, the accounts payable reflected on his books would be the amount that must be actually paid with the cash discount already deducted. The cash discount reduces the cost of the property acquired and not to be recorded in a separate account title such as purchase discount (as in the case of merchandise)
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Full Payment of Outstanding Liability,
ContinuedIllustration Assume that instead of paying on July 11, Labrador paid his account in full with Mansion, Inc. on July 20. The entry to record the transaction is: July 20 Accounts Payable
Discount Lost Cash
Paid account in full.
12,540 460
13,000
COMPUTATION:
Accounts Payable initially recorded Less: Return of one table
Partial Payment
Accounts Payable balance in the books of the buyer Add: Discount lost due to paying after discount period
Original amount of Accounts Payable P28,000 Less: Actual amount of return 5,000 Basis for computing cash discount 23,000 Cash discount percentage x 2% Cash to be paid by the buyer
P 27,440 4,900 10,000 P 12,540 460 P 13,000 =========
Reminder The “Discount Lost” account is to be included in the other expenses category in the functional income statement since this expense was incurred due to the failure of the company to take advantage of the discount given to them by the seller.
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Recording Incidental Charges
Overview The purchase of property, furniture, or equipment may involve additional expenditures for freight, insurance while asset is in transit, brokerage fees, arrastre, handling, storage, customs duties, test runs, installation costs, etc. These expenditures 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. In short, incidental charges are capitalized, i.e., debited to the asset account and not to an expense account
Illustration Assume that on July 20, 20X1, Labrador Trading 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
Purchased delivery van. Terms: with down, balance, 2/10, n/30
937,000
300,000 637,000
July 20 Delivery Equipment Cash
Freight cost of the van purchased.
3,000
3,000 Assume further that Labrador Trading paid for the following incidental charges for the delivery van bought.
Customs duties
Insurance while in transit P 20,000 15,000 The entry to record this is:
July 20 Delivery Equipment Cash
Taxes and insurance paid for the van.
35,000
35,000
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Recording Sale of Property and Equipment
Overview Although property and equipment are not originally intended for sale, these 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 comparison is made between the selling price and the net book value of the asset sold. Net book value is the difference between the acquisition cost of the asset and any depreciation accumulated to date.
Illustration Assume that on July 25, Labrador Trading 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.
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
Sold old typewriter.
8,000 12,000
20,000 COMPUTATION:
Acquisition cost
Less: Accumulated depreciation Net Book value
Resale price No gain or loss P 20,000 12,000 8,000 8,000 - =======
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Recording Sale of Property and Equipment,
Continued
Illustration,
con’t Case 2: Assume that the typewriter was sold at P10,000. The entry to record the transaction is:
Cash
Accumulated depreciation-Office Equipment Office Equipment
Gain on sale of Office Equipment Sold old typewriter.
10,000 12,000 20,000 2,000 COMPUTATION: Resale Price
Less: Net Book Value Acquisition Cost
Less: Accumulated Depreciation Gain on sale of office equipment
20,000 12,000 10,000 8,000 P 2,000 ======= Case 3: Assume that the typewriter was sold at P7,000. The entry to
record the transaction is: Cash
Accumulated Depreciation-Office Equipment Loss on sale of Office Equipment
Office Equipment Sold old typewriter
7,000 12,000 1,000 20,000 COMPUTATION: Resale Price
Less: Net Book Value Acquisition Cost
Less: Accumulated Depreciation Loss on sale of office equipment
20,000 12,000 7,000 8,000 (P 1,000) ========
Reminder Any gain on the sale of property and equipment is classified as other income because it is an income from a source which is not from the ordinary course of business operations. Any loss on the sale is classified as other expense in the functional income statement.
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