Property, Plant, and Equipment

Cost of LandThese costs are debited to the LAND account:

• Purchase price less cash discount• Legal fees and other expenditures for establishing clean title• Broker’s commission• Fees for registration and transfer of title• Cost of relocation or reconstruction of property belonging to others in order to

acquire possession• Mortgages, encumbrances, and interest on such mortgages assumed by the buyer• Unpaid taxes up to date of acquisition assumed by the buyer• Cost of survey• Cost of clearing and demolishing unwanted old structures, less proceeds from

salvage• Payments to tenants to induce them to vacate the premises• Cost of permanent improvement (cost of grading, leveling, and landscaping)• Cost of option to buy the acquired land. If the land is not acquired, the cost of

option is expensed outright.

Cost of BuildingThese costs are debited to the BUILDING account

If the building is purchased:• Purchase price less cash discount• Legal fees and other expenses incurred in connection with the purchase• Unpaid taxes up to date of acquisition• Interests and other encumbrances on the building assumed by the buyer• Payments to tenants to induce them to vacate the building• Any renovating or remodeling costs incurred to put a building purchased in a

condition suitable for its intended use such as lighting installations, partitions, and repairs

If the building is constructed:• Materials used, labor employed and overhead incurred during the construction• Building permit or license• Architect fee• Superintendent fee• Cost of excavation

• Cost of temporary buildings used as construction offices and tools or materials shed

• Expenditures incurred during the construction period such as interest on construction loans and insurance

• Expenditures for service equipment and "xtures made as permanent part of the structure

• Cost of temporary safety fence around construction site and cost of subsequent removal thereof

• Cost of constructing the sidewalks, pavements, parking lot, driveways if such expenditures are part of the blueprint for the construction of a new building; otherwise, the cost is charged to Land Improvements.

• Cost of insurance taken during the construction of the building• Expenditures for shelves, cabinets, and partitions if such expenditures are

immovable in the sense that they are attached to the building; otherwise, the expenditures are charged to Furniture and Fixtures.

• Cost of ventilating/air-conditioning system, lighting system, and elevator are charged to the building account if they are installed during the construction of the building; otherwise, they are charged to Building Improvements.

Cost of Machinery/Equipment• Invoice price less cash discount• Freight and other handling charges (FOB Shipping Point)• Insurance while in transit• Installation costs (includes fees of engineers and other professionals called in to

prepare the asset for its intended use), including site preparation and assembling• Cost of testing and trial runs• Cost of safety rail and platform surrounding the machine• Cost of water device to keep machine cool

Cost of Furniture and Fixtures• Invoice price less cash discount• Freight and other handling charges (FOB Shipping Point)• Insurance while in transit

Net Method Accounting (Applicable to purchase of PPE)

This is the procedure by which "xed assets are recorded by the buyer at invoice price less cash discount plus incidental expenses. The cash discount is immediately deducted without full payment yet.

Procedures1. Deduct from the catalog or list price the trade discount(s) to get the invoice price.2. Deduct from the invoice price any downpayment and/or any portion credited to Notes

Payable to get the initial amount of Accounts Payable. If there is no downpayment and/or Notes Payable, the invoice price is automatically the initial amount of Accounts Payable.

3. Deduct from the initial Accounts Payable balance the following to obtain the net Accounts Payable:

a. Allowance granted (at gross amount, if you are given a problem solving type)b. Cash discount [(Initial Accounts Payable balance - allowance granted in

letter a) × cash discount rate]4. Add to the net liability (net Accounts Payable) the following to get the total acquisition

costs of the "xed asseta. Incidental capital expenditures to put the asset into useb. Downpayment and/or Notes Payable (if any)

5. The acquisition cost of a "xed asset under the net method accounting is not affected whether or not full payment is made within the discount period.

6. When full payment is made beyond the discount period, the buyer debits the Discount Lost account for the forfeited cash discount.

7. The formula in computing the Discount Lost is as follows:a. If there is an allowance granted by supplier:

Initial amount of Accounts Payable xxx

Less: Allowance granted (at gross amount) xx

Net amount of Accounts Payable xxx

Multiplied by: Cash Discount Rate xx

DISCOUNT LOST xx

b. If the supplier did not grant any allowance:

Initial amount of Accounts Payable xxx

Multiplied by: Cash Discount Rate xx

DISCOUNT LOST xx

ILLUSTRATIVE PROBLEM

June 2011

1 Goldcrest Grocery purchased microcomputer from Platinum Corporation for P100,000 less 10-5 on terms: P10,000 down and the balance 2/10 n/30

1 Freight of P2,300 is on terms: FOB Shipping Point, Collect

4 Sent debit memo to the corporation due to minor damage on the computer.s casing for which the corporation granted an allowance of P10,000

6 Paid the following: cost of software, P12,500; installation and test runs, P2,800; cost of repainting the computer table, P1,550.

9 Issued a check for P20,000 to Platinum Corporation as partial payment of account

13 Fully settled account with Platinum Corporation

JOURNAL ENTRIES - BOOKS OF GOLDCREST TRADING

June 2011

1 Office Equipment 83,990 Cash 10,000 Accounts Payable - Platinum Corporation 73,990

1 Office Equipment 2,300 Cash 2,300

4 Accounts Payable - Platinum Corporation 9,800 Office Equipment 9,800

6 Office Equipment 15,300 Repairs and Maintenance 1,550 Cash 16,850

9 Accounts Payable - Platinum Corporation 20,000 Cash 20,000

13 Accounts Payable - Platinum Corporation 44,190 Discount Lost 1,310 Cash 45,500Notes:

a. The Discount Lost account is used only when full payment is made beyond the discount period.

b. If full payment is made on June 11 (within the discount period), the entry would be:

11 Accounts Payable - Platinum Corporation 44,190 Cash 44,190

ACCOUNTING FOR DISPOSAL OF FIXED ASSET BY SALE

A. Selling price is equal to carrying valueIn this particular case, the sale will not involve any gain or loss from the sale of "xed asset.

Cash xxxx Accumulated Depreciation xxxx Fixed Asset (speci"y) xxxx B. Selling price is higher than carrying value

Cash xxxx Accumulated Depreciation xxxx Fixed Asset (speci"y) xxxx Gain on Sale of Fixed Asset (specify) xxxx

C. Selling price is lower than carrying value Cash xxxx Accumulated Depreciation xxxx Loss on Sale of Fixed Asset (specify) xxxx Fixed Asset (speci"y) xxxx

ILLUSTRATIVE PROBLEM

On January 2, 2011, Platinum Trading sold one of its office equipment costing P60,000, with accumulated depreciation of P48,000. Prepare the journal entries to record the sale of the equipment if the selling price is:

a. P12,000b. P15,000c. P10,000

JOURNAL ENTRIES

a. Selling price is P12,000

Cash 12,000 Accumulated Depreciation - Office Equipment 48,000 Office Equipment 60,000

b. Selling price is P15,000

Cash 15,000 Accumulated Depreciation - Office Equipment 48,000 Office Equipment 60,000 Gain on Sale of Office Equipment 3,000

c. Selling price is P10,000

Cash 10,000 Accumulated Depreciation - Office Equipment 48,000 Loss on Sale of Office Equipment 2,000 Office Equipment 60,000