INITIAL RECOGNITION –
PURCHASE ON ACCOUNT (No. 1)
Assume that an equipment is purchased under the terms 2/10, n/30. The invoice price is
P100,000.
Upon purchase
Equipment
98,000
Accounts Payable
98,000
IF Payment within 10 days
Accounts Payable
Cash
98,000
IF Payment beyond 10 days
Accounts Payable
Discounts Lost
Cash
98,000
2,000
98,000
100,000
Initial Recognition – Installment Purchase
(No. 2)
An equipment with cash price of P479,079 is
acquired by making a down payment of
P100,000 and paying 5 annual installments of
P100,000.
The effective interest rate on the above
transaction is 10%, computed as follows:
PV factor = (P479,079 – 100,000) / 100,000
= 3.79079
Under line 5, in the PV table of an ordinary
annuity, the applicable interest rate is 10%.
Initial Recognition – Installment Purchases
Upon purchase
Equipment
Cash (DP)
Contract Payable
First installment payment
Contract Payable
Interest Expense
Cash
TOTAL
Second Installment Payment
Contract Payable
Interest Expense
Cash
TOTAL
479,079
100,000
379,079
62,092
37,908
100,000
100,000
100,000
68,301
31,699
100,000
100,000
100,000
Illustration (No. 3)
(Estimated Dismantling Cost)
On January 1, 2007, Julia Company
purchased a machine for P2,500,000 cash.
The machine’s total useful life is 5 years.
Julia further estimates that the machine shall
be dismantled at P100,000 at the end of its
useful life. The discount rate is 10%. Record
the acquisition of the machine and related
journal entries for 2007.
Journal Entries
1/1
12/31
Machine
2,562,092
Cash
Provision for machine disposal
Depreciation
Accumulated depreciation
( 2,562,092 / 5 years)
Accretion expense or
Finance Cost
Provision for machine disposal
( 62,092 x 10%)
2,500,000
62,092
512,418
512,418
6,209
6,209
Capitalization of Cost of Replacement Carrying Value of Replaced Parts Known
Illustrated (No. 4)
A building with an estimated useful life of 20
years is constructed at a total cost of
P2,500,000. After 10 years, the wooden roof is
replaced with a concrete roof costing P250,000.
The original cost of the wooden roof is
P200,000.
Journal Entries
To capitalize the replacement
Building
Cash
250,000
To derecognize replaced roof
Loss on retirement
Accum Depreciation
Building
100,000
100,000
250,000
To record subsequent annual depreciation
Depreciation
140,000
Accum Depreciation
200,000
140,000
Building (2,500,000 + 250,000 – 200,000)
Accumulated Depreciation ( 1,250,000 – 100,000)
Revised Book Value
Remaining life in years
Annual depreciation
2,550,000
1,150,000
1,400,000
10
140,000
Capitalization of Cost of Replacement - Carrying Value
of Replaced Parts Not Known Illustrated (No. 5)
Assume the same data:
To capitalize the replacement
Building
Cash
To derecognize replaced roof
Loss on retirement
Accum Depreciation
Building
250,000
250,000
125,000
125,000
250,000
To record subsequent annual depreciation
Depreciation
137,500
Accum Depreciation
Building (2,500,000 + 250,000 – 250,000)
Accum Depreciation ( 1,250,000 – 125,000)
Revised Book Value
Remaining life in years
Annual depreciation
137,500
2,500,000
1,125,000
1,375,000
10
137,500
(No. 6) Proportional and Elimination
Illustrated
Assume the following data for an item of machinery
Cost
P8,000
Accumulated depreciation
2,000
The revalued amount (fair value at date of
revaluation) is P9,000.
Age of asset is 5 years, useful life is 20 years
Journal Entries
Computation:
Cost
(A)
Mach 8,000
AD
2,000
CA
6,000
HC%
100
25
75
Revalued
(B)
12,000
3,000
9,000
Using Proportional Method:
Machinery
Accumulated Depreciation
Revaluation Surplus (equity)
Or Using Elimination Method:
Accumulated Depreciation
Machinery
Machinery
Revaluation Surplus (equity)
Difference Life
(A-B)
4,000
20
1,000
5
3,000
15
4,000
1,000
3,000
2,000
2,000
3,000
3,000
(No. 7) Reversal of Revaluation Increase & Decrease
Illustrated
Data:
A
Cost
1/1/01
Cost
5,000
AD
2,000
BV/SV 3,000
Total life
Expired life
Remaining life
HC%
100
40
60
B (est)
Replacement
1/1/05
8,000
3,200
4,800
B-A
3,000
1,200
1,800
C
C-A
Replacement
1/1/08
3,500
(1,500)
2,450
450
1,050
10 years
4 years
6 years
7 years
3 years
Journal Entries
1/1/05
To record revaluation (increase in replacement)
Equipment
3,000
Accum Depreciation
1,200
Revaluation Surplus
1,800
12/31/05 To record depreciation
Depreciation (4,800/6 yrs)
Accum Depreciation
800
800
To record piece-meal realization of gain
Revaluation Surplus (1,800/6 yrs) 300
Revaluation gain
300
Journal Entries
12/31/06
To record depreciation:
Depreciation (4,800/6 yrs)
800
Accum Depreciation
800
To record piece-meal realization of gain:
Revaluation Surplus (1,800/6 yrs)
300
Revaluation gain
12/31/07
300
To record depreciation:
Depreciation (4,800/6 yrs)
800
Accum Depreciation
800
To record piece-meal realization of gain:
Revaluation Surplus (1,800/6 yrs)
Revaluation gain
300
300
Journal Entries
1/1/08 To record revaluation (decrease in replacement):
Accum depreciation
Revaluation Surplus (1,800-300-300-300)
Revaluation Loss (balancing figure)
Equipment
Per Books
12/31/07 %
Eqpt.
8,000
100
AD
5,600
70
CV
2,400
30
Replacement
3,500
2,450
1,050
Balance of Rev Surplus, 12/31/07
P900
Difference
(4,500)
(3,150)
(1,350)
3,150
900
450
4,500
Life
10
7
3
Journal Entries
12/31/08 To record depreciation:
Depreciation (1,050/3 yrs)
Accum depreciation
350
To record piecemeal realization:
None since balance of Revaluation
Surplus 1/1/08 is P -0-
350
(No. 8) Illustration (Reversal of Revaluation
Decrease then Increase in Revaluation )
Data:
Land
A
Cost
1/1/01
5,000
B
B-A
Revalued Amount
1/1/05
4,000
(1,000)
C
Revalued Amount
1/1/08__
5,500
1/1/05 To record revaluation (decrease in revaluation)
Revaluation Loss
1,000
Land
1,000
1/1/08 To record revaluation (increae in revaluation)
Land
1,500
Gain on Revaluation
1,000
Revaluation surplus
500
C-B
1,500
Impairment of PPE
Illustrated (No. 9)

The following are the ledger balances for an item of
equipment owned by the entity as of December 31, 2005:
 Cost
P1,200,000
 Accumulated depreciation
640,000
 Carrying Amount
560,000
The estimated selling price of this equipment is P400,000,
after incurring estimated disposal cost of P80,000. Net
selling price is 320,000 (400,000-80,000)
This equipment is expected to be useful for five more years,
generating expected annual revenues of P120,000,
incurring annual operating cost of P25,000. Value use is
95,000 (120,000 – 25,000)
Use a discount rate of 10% and the present value factor of an
annuity for 5 years at 10% is 3.79079 .
Impairment Loss
Illustrated
Carrying value
Recoverable amount
a. Net selling price
b. Value in use
95,000 x 3.79079
Impairment Loss
P560,000
P320,000
360,125
360,125
P199,875
Impairment Loss – Equipment
199,875
Accumulated Depreciation
199,875
12/31/06
Depreciation Expense
72,025
Accumulated Depreciation
72,025
360,125/5 = 72,025