PPE (Assistant Class Notes)

Tangible Non-Current Assets
These are assets which have physical form and expected to use more than 12 months.
PPE (Property, Plant and Equipment)

PPE are assets which are bought by business for continuing use with physical form. PPE is an
asset which have life extended more than one accounting periods and earn profit over more
than one accounting period. PPE are tangible item which are held for use in production or supply
of goods or service for rental or other administrative purpose. Tangible PPE are assets which has
life more than one year and resources are controlled by entity and from which future expected
economic benefit inflow to the entity.
Capital and Revennue expenditure

Those expenditures which are included in cost of PPE in statement of financial position are called
capital expenditure and rest which are written off in statement of profit and loss are called
revenue expenditure.
Recognition Criteria for PPE (IAS-16)
Items of PPE are recognized as asset when:
• It is probable that future economic benefit associated with assets will inflow into the
entity.
• Cost should be reliably measured
Initial Measurement
An item of PPE should be initially measured at cost. The cost of PPE includes:
- Purchase cost
- Freight
- Site preparation charges
- Delivery and handling
- Irrecoverable tax
- All related professional, legal and engineering fees
- All other cost that needs the assets to bring in working condition for its intended use.
- Trials and tests
- Burrowing cost – not required in f3
- Dismantling cost – not required in f3
The cost that should be excluded or never be capitalized includes:
- Abnormal waste cost
- Warranty cost while purchasing
- Storage cost
- General and administrative cost
- Staff training cost
- Cost incurred after the asset is physically ready for use
-
Subsequent Expenditure
Subsequent expenditure should be treated as expenses. However, it should be capitalized if
recognition principle is matched.
For Example:
- Modification to extend its useful life
- Modification to extent to increase production capacity
- Upgrade the machine to improve the quality of assets
- Adoption of new process leading to large reduction in cost
PPE Exchange
In case of exchange. PPE are measured at fair value for exchange of similar item
For example,
While exchanging $5000 car with $6000 car then,
Dr. PPE – 6000
Cr. PPE – 5000
Cr. Income – 1000
Depreciation
Depreciation is the systematic allocation of cost over its useful life. It should reflect the pattern
in which asset's economic benefit are consumed by entity.
Methods of calculating depreciation
1. Straight Line Method (cost-residual value)/useful life
2. Reducing Balance Method (CV * depreciation rate)
The main difference between the reducing balance and straight-line methods of depreciation
is that while the reducing balance method charges depreciation as a percentage of an asset's
book value/carrying value, the straight-line method expenses the same amount each year.
In case of straight-line method,

Depreciation is also calculated simply as a certain percentage of cost.
If Depreciation rate is 5% then,
Depreciation = (cost-residual value)*5% Or,
Useful life of asset = 100/5 = 20 years
Depreciation = (cost-scrap value)/20
Carrying Amount or Carrying Value of PPE

CV = Cost – Accumulated depreciation
Journal Entry for Depreciation charge

Dr. Depreciation expense - PNL
Cr. Accumulated Depreciation – Balance sheet
Q.1 On 1 jan 20X1, ABC co. purchased an item of PPE at $25,000. This item of PPE was
depreciated by the straight-line method at 5% per year. What is the carrying value of PPE after
3 years. Show with entry of depreciation. What is the depreciation charge and carrying amount
to be shown in financial statement for the year ended 31 December 20X2.
Soln
Cost = 25000
Depreciation = (25000*5%) = 1250
Carrying value after three years = cost – Ad = 25000-2500= 22500
Q.2 On 1 jan 20X1, ABC co. purchased an item of PPE at $25,000. This item of PPE was
depreciated by the reducing balance method at 5% . What is the carrying value of PPE after 3
years. Show with entry of depreciation.
Soln
Cost/cv Deprn CV
Year – 1 25000 25000*5% = 1250 25000 – 1250 = 23750
Year – 2 23750 23750*5% = 1187.5 23750 – 1187.5 = 22562.5
Year – 3 22562.5 22562.5*5% = 1128.125 22562.5 – 1128.125 = 21434.375
Subsequent Measurement
a) Cost Model
CV of PPE = Cost – AD
b) Revaluation Model (Fair Value)
CV of PPE = Fair Value – AD
Revaluation Model
If an asset's carrying amount is increased as a result of a revaluation, the increase shall be
recognized in other comprehensive income and accumulated in equity under the heading of
revaluation surplus.
If an item of PPE is revalued, then all assets related to that class should be revalued.
Revaluation of a non-current asset is accounted as:
Dr. Cost of PPE xx (Revalued amount – Original cost)
Dr. Accumulated Depreciation xx
Cr. Revaluation Surplus xx (Revalued amount – Carrying value)
Q. Hamstrung runs a kilt-making business in Scotland. It has run the business for many years
from a building which originally cost $300,000 and on which $100,000 accumulated depreciation
has been charged to date. Hamstrung wishes to revalue the building to $750,000. Find the
financial statement extract. To find: CV and Revaluation surplus
Soln
Cost = 300000
AD = 100000
Carrying Value = 300000-100000= 200000
Statement of Financial Position:
NCA = 750,000
Equity
- R/s = 550,000
Revaluation Surplus = Revalued Amount – Carrying Value at that date
= 750,000-200,000 = 550,000
Dr. PPE(Balancing) – 450,000 ( Revalued amount – cost of NCA) = 750000- 300000 = 450000
Dr. Accumulated Depreciation – 100,000
Cr. Revaluation Surplus – 550,000
Show the financial statement extract.
PNL Statement
Depreciation Expense = xxxx
Other comprehensive income:
Revaluation surplus = 550000
Statement of financial position
NCA:
PPE 750000
Equity:
Revaluation surplus 550000
Statement of changes in equity
Revaluation surplus 550000
Q. A company bought a property four years ago on 1 jan for $ 170,000. Since then property
prices have risen substantially and the property has been revalued at $ 210,000.
The property was estimated as having a useful life of 20 years when it was purchased. What is
the balance on the revaluation surplus reported in the statement of financial position.
Soln
Cost = 170000
RA = 210,000
Carrying value just before the date of revaluation,
CV = 170000-170000/20*4 = 136000
Revaluation surplus = RA – CV = 210,000-136,000= 74000
Dr. PPE ( RA-cost)- (210,000-170,000) = 40,000

Dr. Accumulated depreciation –(170000/20*4) = 34000
Cr. Revaluation surplus = 74000
Disposal of NCA
If,
Cost - $100 m
AD – $60 m
Disposal on $80m
1) Dr. cash – 80
Cr. Disposal – 80
2) Dr. Disposal – 100
Cr. PPE – 100
3) Dr. AD – 60
Cr. Disposal
Dr. cash – 80
Dr. AD – 60
Cr.PPE – 100
Cr. Income – 40
Transfer of excess depreciation
The excess of the new annual depreciation charge over the old depreciation charge may
be the subject of an annual transfer from revaluation surplus to retained earnings.
Dr. Revaluation Surplus XX

Cr. Retained Earnings XX
Disposal of Previously Revalued Assets

When the previously revalued asset is disposed off then all the revaluation gain
related to that asset should be transferred to the retained earnings.
For Example: If an asset has a carrying amount on a certain date of $10,000 and it is
revalued by $12,000 at that date, we get revaluation surplus of $2000. When this
asset is disposed off, then the previous revaluation surplus of $2000 should be
transferred to the retained earnings.
Dr. Revaluation surplus $2000
Cr. Retained Earnings $2000
Some important ledger accounts
Dr. Disposal a/c Cr.

PPE – cost 100 Cash 80
PNL (Income) 40 AD 60
Loss on disposal XX
Dr. PPE Cost A/C Cr.

$ $
B/F XX cash received from disposal XX
Addition/Purchase XX loss on disposal XX
Revaluation Surplus XX AD XX
C/F XX
Dr. PPE CV A/C Cr.
$ $
B/F XX Depreciation XX
Addition/Purchase XX Cash received from disposal XX
Revaluation Surplus XX loss on disposal XX
C/F XX
1. ABC Co had non-current assets with a cost of $2,260,000 at the start of 20X8. During the year the following
transactions took place:
a. Non-current assets with a cost of $545,000 were purchased
b. Assets costing $290,000 were sold for $130,000
c. A building which had cost $700,000 and had a carrying amount of $350,000 was revalued to $900,000
What is the balance on the non-current assets cost or revaluation account at 31-Dec-20X8?
a. $3,065,000
b. $2,715,000
c. $2,875,000
d. $3,225,000
PPE Cost A/C
$ $
B/F 2,260,000 Disposal 290,000
Addition/Purchase 545,000
Revaluation Surplus 200,000 C/F 2715000
RS = 900,000 -350,000 = 550,000

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Tangible Non-Current Assets

PPE (Property, Plant and Equipment)

Capital and Revennue expenditure

In case of straight-line method,

Carrying Amount or Carrying Value of PPE

Journal Entry for Depreciation charge

Dr. PPE ( RA-cost)- (210,000-170,000) = 40,000

Dr. Revaluation Surplus XX

Disposal of Previously Revalued Assets

Some important ledger accounts

Dr. Disposal a/c Cr.

Dr. PPE Cost A/C Cr.

RS = 900,000 -350,000 = 550,000

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