PPE

Property, plant, equipment:

A. Land
Classification:
1. PPE – land used as a plant site
2. Investment property – land held for a currently undetermined use; land held for
long term capital appreciation
3. Inventory (Current asset) – land held for current sale, by a real estate developer

Cost:

a. Purchase price
b. Legal fees, escrow fees, broker or agent commission, registration fees and transfer
titles.
c. Cost of relocation or reconstruction of property belonging to others in order to
acquire possession.
d. Mortgages, encumbrances, and interest on such mortgages, unpaid taxes up to date
of acquisition for which the buyer ASSUMED.

 Real property taxes are treated as outright expense unless they are unpaid and
assumed by the buyer in acquiring land, they are capitalized but only up to their
date of acquisition.

e. Payments to tenants to induce them to vacate the land in order to prepare the land
for the intended use but not to make room for the construction of a new building.
f. Cost of permanent improvements such as cost of grading, levelling, and landfill.

Land improvements are non-depreciable and charged to land account.

Examples: Cost of surveying, grading, levelling, and landfill, also cost of subdividing.

 Land improvements which are depreciable (over their useful life), are charged to a
special account “Land Improvements”
Examples: fences, water systems, drainage systems, pavements, sidewalks, and cost
of trees, shrubs and other landscaping.

g. Cost of option to buy the acquired land (such cost is expensed outright if the land
is not acquired.)
 h. Special Assessments
- these are taxes paid by the landowner as a contribution to the cost of
public improvements.
*Rationale: such improvements increase the value of land.
(Net demolition cost is capitalized as cost of the land, if the old building is demolished to
prepare the land for the intended use but not to make room for the construction of new
building.)

B. Building
Cost of building when PURCHASED:
a. Purchase price
b. Legal fees
c. Unpaid taxes up to date of acquisition
d. Interest, mortgage, liens, and other encumbrances assumed by the buyer.
e. Payments to tenants to induce them to vacate the building.
f. Any renovating or remodeling costs incurred to put a building purchased in a
condition suitable for the intended use such as lighting installations, partitions,
and repairs.
Building fixtures:
Expenditures such as shelves, cabinets, and partitions are charged to building
account if: these are immovable (removal of such may destroy the building).
Although if they are movable, such are charged to furniture and fixtures and
depreciated over useful life.

Cost of building when CONSTRUCTED:

a. Direct materials, labor, and overhead incurred.

b. Building permit or license
c. Architect fee, superintendent fee, and safety inspection fee.
d. Cost of excavation
e. Cost of temporary buildings used as construction offices and tools or materials
shed.
f. Expenditures incurred during the construction period such as interest on
construction loans and insurance
g. Expenditures for service equipment and fixtures made a permanent part of the
structure.
h. Cost of temporary safety fence around the construction site and cost of subsequent
removal thereof. (Permanent safety fence are recognized as land improvement.)

If land improvements are part of the blueprint for the construction of a new building,
they are charged to the building account.
 i. Claims for damages – there are two scenarios to such costs:
Insurance is taken – cost of insurance is charged to the building account.
Insurance is not taken – any payment for damages are expensed outright and not
charged to the building account.
*Failure to procure insurance is a reflection of management negligence.
j. Ventilating system, lighting system, elevator – if they are installed during
construction, they are charged to the building account – unless they are, they are
charged to building improvements.

LAND AND BUILDING (PIC INTERPRETATION)

1. Land and old building are purchased at a single cost:
 If the old building is usable, the single cost is allocated between the two based on
relative fair value.
 If it is unusable, the single cost is allocated to land only.
2. The old building is demolished immediately to make room for construction of new
building:
 Building is PPE/ Investment property –
o allocated CA of usable old building recognized as loss.
o Demolition cost minus salvage value is capitalized as cost of new building.
 Building is Inventory – allocated CA of usable old building is capitalized as cost of
new building.

 Net demolition cost is capitalized as cost of the land, if the old building is
demolished to prepare the land for the intended use but not to make room for the
construction of new building.
3. Acquired building and used for prior periods but demolished in the current period to
make room for construction of a new building:
 CA of old building is recognized as loss regardless of the classification of the
building.
 Net demolition cost is capitalized as cost of the new building.
 If the old building is subject to contract lease, any payments to tenants are charged to
the cost of the new building.
C. Machinery
Cost when purchased:
a. Purchase price
b. Acquisition cost such as freight, handling, and storage.
c. Insurance while in transit
d. Installation cost including site preparation and assembling
e. Cost of testing and other cost necessary in preparing the machinery for its
intended use.
f. Initial estimate of cost of dismantling and removing the machinery and restoring
the site on which it is located and for which the entity has a present obligation.
g. Consultant fees
 h. Cost of safety rail and platform surrounding machine
i. Cost of water device to keep machine cool
j. Any irrecoverable or nonrefundable purchase tax
 VAT on machinery purchased are not capitalizable but charged to input tax.

D. Equipment
1. Delivery equipment – cars, trucks, and other vehicles used in business operations.
store equipment and office equipment - computers, typewrites, adding machines, cash
register, and calculator.
2. Furniture and fixtures – showcases, counters, shelves, display fixtures, cabinets,
partitions, safes, desks, and tables. Such may include store and office equipment.
Cost: Purchase price, freight and other handling charges, insurance while in transit,
installation costs, and other costs necessary in preparing them for intended use.

Accounting for PPE

Initial Recognition – measured @ cost
Cost – is the amount of cash or cash equivalent paid and the fair value of the other
consideration given to acquire an asset at the time of acquisition or construction.
Elements of cost:
1. Purchase price, including import duties and nonrefundable purchase taxes, after
deducting trade discounts and rebates.
2. Directly attributable costs in bringing the asset to the location and condition necessary
for it to be capable of operation in the manner intended by management.
Examples
 Cost of site preparation
 Initial delivery and handling cost
 Installation and assembly cost
 Professional fees
 Cost of testing whether the asset is functioning properly
 Cost of employee benefits arising directly from the acquisition of PPE.
3. Initial estimate of the cost of dismantling and removing the item and restoring the site
on which it is located, which the entity has a present obligation.

Accounting for Acquisition of Property

1. On cash basis – cost of asset includes cash paid plus directly attributable costs.
* If the land and building are acquired at a “basket price” or lump-sum price, it is
necessary to apportion the single price to the assets on the basis of relative fair value.
 2. On account – if may cash or trade discount, ibawas mo regardless kung kinuha or
hindi.
For example: 1,000,000 invoice price, 5% discount
Cost of asset = 1,000,000 x 95%
= 950,000
Use net method in recording purchases on account; cash discounts are reduction of
cost and not income hence any discounts are recorded as deduction to the asset.
Terms: 100,000 invoice price, 2/10, n/30
Journal entry: Equipment 98,000
Accounts Payable 98,000
3. Installment basis :
a. Pag may cash price – record the cost @ cash price; any difference between
cash price and installment price is the discount on note payable na amortized
annually.
b. No cash price – calculate the present value of all payments, gamitan mo ng pv
of ordinary annuity, plus any down payment to get the total cost of asset.
Again, use effective interest method to amortized the discount.
4. Issuance of share capital –“fair value of consideration received”
Order of priority:
1. FV of property received
2. FV of share capital
3. Par value/stated value of share capital
5. Issuance of bonds payable – fair value plus transaction costs (directly attributable)
Order of priority:
1. FV of bonds payable
2. FV of asset received
3. Face amount of bonds payable
6. Exchange –
a. Commercial substance :
 Payor – FV of asset given plus cash payments
 Recipient – FV of asset given less cash received
b. Lacks commercial substance – FV cannot be measured reliably.
 Carrying amount of the asset given replaces FV in the computation for
payor and recipient.
 No gain or loss is recognized
c. Trade in – exchange of another property which involves a non-dealer
acquiring asset from a dealer. This has commercial substance because it
involves a significant amount of cash.
Cost of new asset:
 FV plus cash payment
 Trade in value plus cash payment (FV is not clearly determinable).
7. Donation
  Contributions from shareholders are recorded at FV with credit going to donated
capital, expenses related to such donation charged to donated capital account, while
directly attributable costs are capitalized.
 Capital gifts or grants shall be recorded at fair value when receivable or received, they
are generally subsidies and recognized as income.
8. Construction – manufacturing costs
 Savings – actual cost is lower than budgeted cost,
o Internal profit is eliminated in arriving at the cost of self-constructed asset.
 If the actual cost exceeds the budgeted cost, the asset is still recorded at the actual
cost.
Income and related expenses from incidental operations are recognized in profit or loss.

Derecognition – cost of PPE together with the accumulated depreciation are removed from
the accounts.
 CA of PPE shall be derecognized on disposal or when no future
economic benefits are expected from the use or disposal.
 Gain or loss from derecognition is included in profit or loss (difference
between net disposal proceeds and the carrying amount of the item.
Fully-depreciated property- if the carrying amount is equal to zero or equal to the residual
value. The asset account and accumulated depreciation are closed and the residual value is set
up in a separate account.
Property classified as held for sale – asset is available for immediate sale in the present
condition within one year from the date of classification as held for sale.
 Current asset excluded from PPE in the statement.
 Measured at lower of CA or FV less cost of disposal, such assets are not
depreciated.
Idle or abandoned property – an asset to be abandoned cannot be classified as held for sale,
the CA would be recovered from continuing use.
 Noncurrent asset to be abandoned includes PPE that is to be used until the end of the
economic life.

Other concepts as to the acquisition of items of PPE: Government Grant and Borrowing
costs

Government Grant (PAS 20)

 Assistance by government in the form of transfer of resources to an entity in return
for part or future compliance with certain conditions relating to the operating activities of
the entity.
 Also called subsidy, subvention, and premium.

Recognition: Grants are recognized when there is reasonable assurance of the entity’s
compliance to follow or comply with the conditions of the grant and that the grant will be
received. Grant shall not be recognized on a cash basis.

Classification:
 Grant related to Asset – grant whose primary condition is that an entity qualifying for
the grant shall purchase, construct, or otherwise acquire long-term assets.
Including nonmonetary grant at fair value.
Presentation: either by (a) setting the grant as deferred income or (b) deducting the
grant in arriving at the carrying amount of the asset.
Example:
Grant received – 500,000
Condition – depreciable asset with 5,000,000 cost; 5 years useful life; residual value
of 200,000

a. Deferred income
Equipment 5,000,000
Cash 5,000,000
Cash 500,000
Deferred income 500,000
Depreciation 960,000
Accumulated depreciation 960,000
(5,000,000 – 200,000 / 5 years = 960,000)
Deferred Income 100,000
Grant income 100,000
(500,000 / 5 years = 100,000)
b. Deducted from asset
Equipment 4,500,000
Cash 4,500,000
Depreciation 860,000
Accumulated depreciation 860,000
(4,500,000 – 200,000 = 4,300,000 / 5 years = 860,000)

 Grant related to income – residual definition

Presentation: either by (a) presented in income statement separately or under the
general heading of other income, or (b) deducted from the related expense.
Accounting for government grant: shall be recognized as income on a systematic basis over
the periods in which an entity recognizes expenses; the related cost for which the grant is
intended to compensate.

1. Grant in recognition of specific expenses shall be recognized as income over the

period of the related expense.

Example: Government grant received – P 15,000,000

Expenses incurred:
First year – 2,000,000
Second year – 3,000,000
Third year – 5,000,000
Total – 10,000,000

Journal entry:
o Cash 15,000,000
Deferred Income 15,000,000
(Initial record ng grant received)
o Deferred income 3,000,000
Grant income 3,000,000
(based on allocation from expenses incurred, recognize income by debiting deferred
income)
Environmental expenses 2,000,000
Cash 2,000,000

Allocation table:
1st year – 2,000,000 / 10,000,000 x 15,000,000 = 3,000,000
2nd year – 3,000,000 / 10,000,000x 15,000,000 = 4,500,000
3rd year – 5,000,000 / 10,000,000 x 15,000,000 = 7,500,000

2. Grant related to depreciable asset shall be recognized as income over the periods in
proportion to the depreciation of the related asset.
Example:
Grant received – 50,000,000
Condition – asset; building (cost 80,000,000; useful life 5 years)
Journal entry:
Cash 50,000,000
Deferred Income 50,000,000
Building 80,000,000
Cash 80,000,000
Depreciation 16,000,000
Accumulated depreciation 16,000,000
(80,000,000 / 5 years = 16,000,000 straight line basis)
 Deferred income 10,000,000
Grant income 10,000,000
(50,000,000 / 5 years = 10,000,000; use useful years in deferring the income)

3. Grant related to non-depreciable asset requiring fulfillment of certain conditions shall

be recognized as income over the periods which bear the cost of meeting the
conditions.
Example:

Grant received – Land (FV of 60,000,000)

Grant condition - construct a refinery on the land (cost of 100,000,000; useful
year of 20 years)

Journal entry:
Land 60,000,000
Deferred Income 60,000,000
Refinery 100,000,000
Cash 100,000,000
Depreciation 5,000,000
Accumulated Depreciation 5,000,000
(100,000,000 / 20 years = 5,000,000)

Deferred Income 3,000,000

Grant income 3,000,000
(60,000,000 / 20 years = 3,000,000)

4. Grant that becomes receivable as compensation for expenses or losses already

incurred for the purpose of giving immediate financial support to the entity with no
further related costs shall be recognized as income of the period in which it becomes
receivable.

Breakdown of such government grant: there is no condition as to the assistance/ grant

received. Since the purpose is immediate financial support due to expenses or losses
already incurred, hence GRANT RECEIVABLE AS COMPENSATION is
recognized as a whole in the period it becomes so. No deferral of income over the
periods of expenses.

Repayment government grant: when there is noncompliance of the conditions of the

government grant received, the grant becomes repayable.
This is accounted as a change in accounting estimate
 1. Repayment of Grant related to Income
Journal entry:
Grant received – 6,000,000; period 3 years
Jan. 1 2021 Cash 6,000,000
Deferred income 6,000,000
Dec. 31, 2021 Deferred Income 2,000,000
Grant income 2,000,000
 On January 1 the following year, the gran becomes repayable because the entity fails
to do the condition for the grant.
January 1, 2022 Deferred income (unamortized/unrealized) 4,000,000
Loss on repayment of grant 2,000,000
Cash 6,000,000
2. Repayment of Grant related to Asset – shall be recorded by increasing the carrying
amount of the asset. Same accounting procedure as to repayment of GRI (deferred
income approach).
Deduction from asset approach: Building – 25,000,000; grant – 5,000,000 – 10 years
2021
Jan. 1 Building 20,000,000
Cash 20,000,000
Dec. 31 Depreciation 2,000,000
Accumulated depreciation 2,000,000
2022
Jan. 1 Building 5,000,000
Cash 5,000,000
Dec. 31 Depreciation 3,500,000
Accumulated depreciation 3,500,000

Depreciation on CA - 2,000,000
Depreciation on increased amount 1,500,000
(5,000,000 / 10 x 3 years)
Total depreciation on 2022 = 3,500,000
 The cumulative additional depreciation that would have been recognized up to date in
the absence of the grant shall be recognized immediately as expense.

Grant of interest-free loan

“forgivable loan from government”, provided that the entity will meet the terms for
forgiveness of the loan. Government loan with a NIL or below-market rate of interest.
Benefit = difference between face amount and present value of the loan
Such benefit is the discount on the loan (note).
 Take note, the interest expense is the same amount as to the deferred gran income and
may be offset against each other. Interest expense and grant income would be zero
each year.
Government assistance
 Government action designed to provide an economic benefit specific to an entity or
range of entities qualifying under certain criteria.
Examples:
1. Free technical or marketing advice
2. Provision of guarantee
3. Government procurement policy that is responsible for a portion of the entity’s
sales.
Disclosures
 Accounting policy adopted for government grant including the method of presentation
adopted in the financial statements.
 Nature and extent of government grants
 Unfulfilled conditions and other contingencies attaching to the government assistance
that has been recognized.
It is not required to disclose the name of the government agency that gave the grant, the dates
of sanction or when the cash was received.

Borrowing costs (PAS 23) – are interest and other costs that an entity
incurs in connection with borrowing of funds.
; which specifically includes:
1. Interest expense (calculated using the effective interest method)
2. Finance charge with respect to a finance lease
3. Exchange difference arising from foreign currency borrowing to the extent that it
is regarded as an adjustment to the interest cost

Qualifying assets – assets that necessarily take a substantial period of time to get ready for
the intended use or sale.
Examples:
1. Manufacturing plant
2. Power generation facility
3. Intangible asset
4. Investment property

Assets EXCLUDED from capitalization of borrowing costs – borrowing costs incurred in

relation to the following are expensed immediately.
1. Assets measured at FAIR VALUE, such as biological assets.
2. Inventory manufacture or produced in large quantity on a repetitive basis.
3. Assets that are ready for their intended use or sale when acquired.

Borrowing costs are incurred due to borrowing of funds necessary for the acquisition of
qualifying assets.
It is mandatory to capitalize borrowing costs directly attributable to the acquisition,
construction, or production of a qualifying asset.
Hence, borrowing costs not directly attributable to a qualifying asset is expensed
immediately.

Commencement of capitalization – capitalization starts when the following conditions are

present:
 When the entity incurs expenditures for the asset
 When the entity incurs borrowing costs
 When the entity undertakes activities that are necessary to prepare the asset for the
intended use or sale
 Such activities include physical construction of the asset, technical and
administrative work like drawing up plans and obtaining permit for the
building. There must be development activities happening.
Suspension of capitalization - capitalization shall be suspended during extended periods in
which active development is interrupted.
*when temporary delay is a necessary part of the process, there is no suspension.
Cessation of capitalization – capitalization shall cease when substantially all of the activities
necessary to prepare the qualifying asset for their intended use or sale are complete. An asset
is normally ready when the physical construction is complete.
Disclosures – amount of borrowing costs capitalized during the period and capitalization rate.
*Separation of qualifying assets from other assets in the balance sheet is not required.

Accounting for Borrowing costs:

Identify first the purpose of borrowing, if it is specific or general.

Specific
= Actual borrowing cost incurred during the period
Less: any investment income from temporary investment of the borrowings.
= Amount of capitalizable borrowing cost

General
= average carrying amount of the asset during the period
Multiplied by: capitalization rate or average interest rate
= amount of capitalizable borrowing cost

 Capitalizable borrowing cost CANNOT EXCEED actual borrowing cost incurred.

 Any investment income is ignored.

Capitalization rate or average interest rate

= total annual borrowing cost / total general borrowings outstanding during the period
Illustration: An entity had the following borrowings on January 1 of the current year.
The borrowings were made for general purposes and the proceeds were partly used to finance
the construction of a new building.
Principal Borrowing cost
10% bank loan 3,000,000 300,000
12% short-term note 1,500,000 180,000
8% long-term note 3,500,000 280,000
Total 8,000,000 760,000

Capitalization rate:
=760,000 / 8,000,000
= 9.5%

Construction of the building was started on January 1 and was completed on December 31 of
the current year. Expenditures on the building were:
January 1 400,000
March 31 1,000,000
June 30 1,200,000
September 30 1,000,000
December 31 400,000
Total 4,000,000
Average carrying amount of the building:

Date Expenditures Months outstanding Amount

January 1 400,000 12/12 400,000
March 31 1,000,000 9/12 750,000
June 30 1,200,000 6/12 600,000
September 30 1,000,000 3/12 250,000
December 31 400,000 -/- 0
Total = 2,000,000

Amount of capitalizable borrowing costs:

2,000,000
X 9.5%
= 190,000

Actual borrowing cost – 760,000

Capitalizable borrowing cost –(190,000)
Interest expense = 570,000

Specific and general borrowing

Illustration: At the beginning of the current year, an entity borrowed 1,500,000 at an interest
rate of 10% specifically for the construction of a new building. The actual borrowing cost on
this loan is 150,000.
The entity had also outstanding during the year a 5-year 8% general borrowing of 7,000,000.
The construction of the building started on January 1 and was completed on December 31 of
the current year. Expenditures on the construction were:

January 1 500,000
April 1 1,000,000
May 1 1,500,000
September 1 1,500,000
December 31 500,000
Total 5,000,000

Amount of average expenditures:

Date Expenditures Months outstanding Amount
January 1 500,000 12/12 500,000
April 1 1,000,000 9/12 750,000
May 1 1,500,000 8/12 1,000,000
September 1 1,500,000 4/12 500,000
December 31 500,000 -/- 0
Total = 2,750,000

Capitalizable borrowing cost:

Average expenditures 2,750,000
Specific borrowing (1,500,000)
General borrowing =1, 250,000

Specific borrowing (10% x 1,500,000) 150,000

General borrowing (8% x 1,250,000) 100,000
Total capitalizable borrowing cost = 250,000

 For construction period more than one year, average expenditures during a period
shall include the borrowing cost previously capitalized.
 If the asset is financed by specific borrowing but a portion is used for working capital
purposes, the borrowing shall be treated as general borrowing in determining
capitalizable borrowing cost.
Accounting for PPE
Subsequent Recognition – measured using either cost model or revaluation model.
Cost model – PPE are carried at cost less any accumulated depreciation and any accumulated
impairment loss.
Revaluation model – PPE carried at revalued carrying amount or fair value at the date of
revaluation less any subsequent accumulated depreciation and subsequent accumulated
impairment loss.

Subsequent costs:
1. Additions – alterations which increases the physical size or capacity of the asset.
Its cost is capitalized.
a. Entirely new unit
b. An expansion, enlargement or extension of the old asset.
2. Improvements or betterments – alterations which increase the service life or the
capacity of the asset. Its cost is capitalized.
a. Replacement of asset or part of the asset with better or superior quality.
3. Replacements – this also involve substitutions but the new assets is not better than
the old asset acquired.
a. Repairs – expenditures which restores the asset in good operating
condition.
i. Extraordinary repairs – material replacement of parts involving
large sums and usually extends the life of the asset.
CAPITALIZED
ii. Ordinary repairs – minor repairs or small sums. EXPENSED
4. Maintenance – keeps the asset in good condition
5. Rearrangement cost – relocation or re-demployment of an existing PPE. This
expenditure is expensed as incurred.

Depreciation
Portion of the expense distributed to the periods during which the asset was used can be
categorized into three:
1. Depreciation – Property, Plant, and Equipment
2. Depletion – wasting assets (natural resources)
3. Amortization – intangible assets

Depreciation is the systematic allocation of the depreciable amount of an asset over its
useful life, a cost allocation in recognition of the exhaustion of the useful life of an item of
PPE. Its objective is to have each period benefitting from the use of asset bear an equitable
share of the asset cost.
Presentation: Expense; either as part of cost of goods manufactured or an operating expense.
  Except non-exhaustible land, all property shall be depreciated on a systematic basis
over the useful life of the asset irrespective of the earning of the entity.
Life cycle:
It starts when the asset is available for use, meaning the asset is in location and condition
necessary for it to be capable of operating in the manner intended by management.
It ends when the asset is derecognized and in cases, discontinued where the asset becomes
a held for sale.

Kinds:
1. Physical depreciation – wear and tear and deterioration over a period. It results to
ultimate retirement of the PPE or termination of the service life of the asset.
 Wear and tear due to frequent use
 Passage of time due to nonuse
 Action of the elements such as wind, sunshine, rain or dust
 Casualty or accident such as fire, flood, earthquake, and other natural
disaster.
 Disease or decay – applicable to animals and wooden buildings.
2. Functional or economic depreciation – an asset becomes obsolete if it is
inadequate or superseded.
 Inadequate – asset is no longer useful to the entity because of an increase
in operation
 Supersession – there is a new and better asset which can perform more
efficiently and economically or for substantially less cost.
 Obsolescence – arises when there is no future demand.

Factors of depreciation:
 Depreciable amount/ cost – is the cost of an asset less residual value.
 Residual value – is the estimated net amount currently obtainable if the asset is at the
end of the useful life. It shall be reviewed each financial year-end and accounted for
as change in accounting estimate.
o When carrying amount is equal to zero (0) or the residual value, depreciation
shall be ceased.
o Residual value cannot be greater than the carrying amount.
 Useful life – period over which an asset is expected to be available for use by the
entity or the number or production or similar units expected to be obtained from the
asset.
o May be expressed as:
 Time periods as in years
 Units of output or production
 Service hours or working hours
o Factors determining useful life:
 Expected usage
 Expected physical wear and tear
  Technical or commercial obsolescence
 Legal limits
o Service life is the period of time an asset shall be used by the entity,
synonymous to the useful life. While physical life refers to how long the asset
shall last.

DEPRECIATION METHOD – there are four categories of depreciation method:

This shall be reviewed at least every year-end, any change is accounted for as change in
accounting estimate.
1. Equal or uniform charge methods
a. Straight-line basis – allocating the depreciable amount equally over the
number of years of estimated useful life. Constant charge over the useful life
of the asset.
Cause of depreciation: Passage of time

Formula:
Annual Depreciation = Cost – residual value
Useful life in years
Straight line rate: 100% / useful life in years
Ex. 100 % / 5 years = 20% rate
b. Composite method – assets that are dissimilar in nature or assets that have
different physical characteristics are grouped together.
c. Group method – assets that are similar in nature and estimated useful life are
grouped together and treated as a single unit.

Accounting procedure is the same for these two methods:

Computation of: average useful life and rate
 Accumulated depreciation is not related to any specific asset account.
 To get the periodic depreciation, the total cost of the group is multiplied to the rate.
 When an asset is retired, no gain or loss is reported.
 Average useful life = total depreciable amount of the group / total annual depreciation
 Composite/group rate = total annual depreciation/ total cost

2. Variable charge or activity methods – principal cause of depreciation: usage,

machineries are appropriate for this kind of depreciation.
a. Working hours method – computation of depreciation rate per hour:
= depreciable amount / estimated useful life in terms of service hours
The depreciation rate is multiplied to actual hours worked.
b. Output or production method – same lang sa working hours method pero to
get the depreciation rate per unit, use estimated useful life in terms of units of
output as the denominator.
3. Decreasing charge or accelerated methods – new assets are generally capable of
producing more revenue in the earlier years than in the later years:
a. Sum of year’s digits (SYD) –
Useful life (5 years)
Depreciable amount x sum of digits in useful life (5+4+3+2+1 = 15)
Formula:
SYD = Life [(Life + 1)/2]
b. Declining balance method (fixed rate on diminishing carrying amount method)
– there must always be a residual value on the asset.

C. Double declining balance – also known as 200% declining balance method,

although meron din 150% declining method.
straight line rate is doubled.

4. Other methods
a. Inventory method – the difference between the value of the asset at the end of
the period and the balance of the account is the depreciation for the period. No
accumulated depreciation is recorded, directly credited to the asset account.
Applied to small and relatively inexpensive assets.
b. Retirement – no depreciation until the asset is retired, depreciation is equal to
original cost of the asset retired less any salvage proceeds
c. Replacement - no depreciation is recorded until the asset is retired and
replaced