PROPERTY, PLANT AND EQUIPMENT
Solution:
List Price 1,000,000
Trade Disc (200,000)
Rebates (100,000)
Purchase Disc (50,000)
Import Duties 150,000
Installation 80,000
Prof fees 30,000
Insurance in transit 40,000
Consultant fee 20,000
Freight 60,000
Safety rail 80,000
Supplies used in testing 70,000
Platform 400,000
Cooler 500,000
Dismantling(obligation) 50,000
Total Cost 2,130,000
Solution:
a. CP 230,000
Freight 10,000
Installation 50,000 300,000
b. DP 100,000
PV (100k x 2.40183)240,183 340,183
Total 640,183
L B
a. 15,000(20x30/40) 5,000(20x10/40)
b. 2,500
c. __________ 4,500(5,000x90%)
17,500,000 9,500,000
PBA: 8,000 + 1,000=9,000,000
NBA: 12,000-1,000=11,000,000
5. Using the same data, what is the gain/(loss) to be recognized, respectively, by PBA
Inc. and NBA Inc. as a result of exchange?
Solution:
G/L= FV-BV
PBA: 8,000-5,000=3,000,000
NBA: 12,000-10,000=2,000,000
6. Using the same data except assuming the cash flows from the two courts are entirely
identical, what is the cost to be capitalized by PBA Inc. and NBA Inc., respectively, for
their new basketball courts?
at carrying amount
PBA: 5,000+1,000=6,000,000
NBA: 10,000-1,000=9,000,000
What is the cost of the new asset acquired as basis for recording in the books of Tweeny?
500,000
What amount should Tweeny report as a gain on exchange of the vans? 150,000
On Nov. 5, 2020, Troy Corporation issued 10,000 shares of the P25 par treasury ordinary
shares for a parcel of land to be held for a future plant site. The treasury shares were acquired
by Troy at a cost of P30 per share. Troy’s ordinary share had a fair market value of P40 per
share on Nov. 5, 2020. Troy received P50,000 from the sale of scrap when an existing
structure on the site was razed.At what amount should the land be carried? *
On August 1, 2020, Sunny Corporation purchased a new machine on a deferred payment
basis. A down-payment of P200,000 was made and a 4 annual installments of P600,000 each
are to be made beginning on September 1, 2020. Terms of the contract is not normal in the
industry where the same type of assets are being traded. Due to an employee strike, Sunny
could not install the machine immediately, thus, incurred P3,000 of storage costs. Cost of
installation(excluding the storage costs) amounted to P20,000. The cash price of the machine
was P2,300,000.How much should be capitalized as cost of the machine? P2,320,000
Beanbag Company received a donation of land from a rich local philanthropist. The land
originally had a cost of P1,000,000. On the date of donation, the land had a fair value of
P1,500,000 and an assessed value of P1,200,000. What amount of income should be
recognized from the donation? 1,500,000
Edge company buys a van with a list price of P3,000,000. The dealer grants a 15% reduction
in list price and an additional 2% cash discount on the net price if payment is made in 30
days. Irrecoverable taxes amount to P40,000 and the entity paid an extra P30,000 to have a
special horn installed. What amount should be recorded as initial cost of the van?
On Sept. 1, 2020, Vida Company issued 100,000 treasury shares with P25 par value for a
parcel of land to be held as future plant site. The treasury shares were acquired at a cost of
P30 per share. The entity’s share had a fair value of P40 on September 1, 2020. The entity
received P50,000 from the sale of scrap when an existing structure on the site was razed.
What is the initial measurement of the land? 3,950,000
On Dec. 31, 2020, Ruth Company traded equipment with an original cost of P400,000 and
accumulated depreciation of P160,000 for another equipment with a fair value of P240,000. In
addition, Ruth received P120,000 cash in connection with this exchange. The exchange
transaction lacks the necessary commercial substance.What is the amount of gain should
Ruth recognize? 0
Quick Company purchased a varnishing machine for P3,000,000 on January 1, 2020. The
entity received a government grant of P500,000 in respect of this asset. The accounting policy
is to depreciate the asset over 4 years on a straight line basis and to treat the grant as
deferred income. What is the carrying amount of the asset on December 31, 2020?
P2,250,000
Quick Company purchased a varnishing machine for P3,000,000 on January 1, 2020. The
entity received a government grant of P500,000 in respect of this asset. The accounting policy
is to depreciate the asset over 4 years on a straight line basis and to treat the grant as
deferred income.What amount of income from the government grant is recognized for 2020?
P125,000
What is the cost of the land? P13,750,000
Using the same data, what is the cost of the land improvements? P900,000
Using the same data, what is the cost of the newly constructed building?
Using the same data, what is the cost that shall be expensed as incurred? P1,300,000
On January 1, 20x1, Entity A received land with fair of ₱200,000 from the government
conditioned on the construction of a building on the lot. Entity A started immediately the
construction and it was completed on December 31, 20x1 for a total cost of ₱1,000,000. The
building has an estimated useful life of 10 years and zero residual value. How much is the
income from government grant in 20x1 and 20x2, respectively? 0 ; 20,000
How much is the carrying amount of the building on December 31, 20x2 under the following
presentations? Gross presentation Net presentation ? 900,000 ; 720,000
How much is the depreciation expense recognized in 20x3 under the following presentations?
Gross presentation Net presentation ? 100,000 ; 80,000
How much borrowing costs are capitalized to the cost of the constructed qualifying asset?
920,000
How much is the cost of the qualifying asset on initial recognition? 14,920,000
Merry Co. purchased a machine costing ₱125,000 for its manufacturing operations and paid
shipping costs of ₱20,000. Merry spent an additional ₱10,000 in testing and preparing the
machine for use. What amount should Merry record as cost of the machine? 155,000
Peterson, Inc. purchased a machine under a deferred payment contract on December 31,
20x1. Under the terms of the contract, Peterson is required to make eight annual payments of
₱140,000 each beginning December 31, 20x2. The appropriate interest rate is 8%. The
purchase price of the machine is? 804,520
41,650
952,500
MACHINERY
What is the cost that shall be expensed as incurred? P1,100,000
What is the cost to be capitalized as machinery?
What is the initial measurement of the new machine?
GOVERNMENT GRANT
On January 1, 2020, GV Inc. received P3,000,000 from Province of Batangas for the calamity
loss it incurred in its satellite during the typhoon MARING in 2019. The remaining useful of the
satellite is 3 years. What is the realized income from government grant to be recognized by
GV Inc. for the year ended December 31, 2020? P3,000,000
On January 1, 2020, The Philippine Government donated P40,000,000 to AYALA LAND Inc.
to be used by the former for the construction of its new car factory. The total cost of
constructing the factory is P100,000,000. It has a useful life of 50 years and residual value of
P10,000,000. It is AYALA LAND’s policy to account for government grant as a deduction from
the cost of the related asset. What is the carrying value of the building on December 31,
2020? P59,000,000
On January 1, 2020, the City of Makati donated P10,000,000 to Globe Inc. to be used by the
former for the construction of its new satellite. The total cost of manufacturing the satellite is
P30,000,000. It has a useful life of 20 years and residual value of P5,000,000. It is GLOBE’s
policy to account for government grant as deferred income. What is the carrying value of
deferred income from government grant on 12/31/2022 GLOBE’s Statement of Financial
Position? P8,500,000
SM Inc. received P9,000,000 from the City of Lipa on December 31, 2020. The condition of
the donation is that SM shall clean the river near it for 3 years. The following are the costs
incurred by SM Inc. in cleaning the river:2020 – P4,000,000 2021 – P6,000,000 2022 –
P10,000,000What is the carrying value of the deferred income to be presented in the
12/31/2021 SM’s Statement of Financial Position?
UST Inc., a private profitable educational institution, received P5,000,000 from the City of
Manila on January 1, 2020. The deed of donation provides that the cash shall be used by UST
Inc. for its community involvement activities for 4 years. The following are the expenditures
incurred by UST Inc. for its community involvement activities: 2020 – P1,000,000; 2021 –
P2,000,000; 2022 – P3,000,000; 2023 – P4,000,000. What is the realized income from
government grant to be recognized by UST Inc. for the year ended December 31, 2022?
P1,500,000
BOROWING COSTS
On January 1, 2020, Milestone Company was granted a loan of P2,000,000 at an interest rate
of 10% specifically to finance the construction of its new building. Availments from the loan
were made quarterly in equal amounts. Total borrowing costs amounted to P125,000. Prior to
their disbursements, the proceeds of the loan were temporarily placed in a special savings
account and earned interest income amounting to P20,000. The building was completed on
December 31 of the same year. Using the alternative treatment, how much should Milestone
Company capitalize as borrowing costs? 105,000
Faith, Inc. has a fiscal year ending April 30. On May 1, 2020, Faith borrowed P10,000,000 at
15% to finance construction of its own building. Repayments of the loan are to commence on
the month following completion of the building. During the year ended, April 30, 2021,
expenditures for the partially completed structure totaled 6,000,000. These expenditures were
incurred evenly throughout the year. Interest earned on the unexpended portion of the loan
amount to P400,000 for the year. How much should be shown as capitalized interest on
Faith’s financial statements at April 20,2021 under the alternative method? 450,000
149,400
LAND AND BUILDING
Land and building exercises
Problem 1.
Gale company purchased land for P2,000,000 as a plant site. There was a small office building on the
land with fair value of P700,000 which the entity will continue to use with some modification and
renovation.
The entity decided to construct a factory building and incurred the following costs:
Land Building Factory
Building
Purchase Price 1,300,000 700,000
Materials and Supplies 3,000,000 3,000,000
Excavation 100,000 100,000
Labor on Construction 2,500,000 2,500,000
Cost of remodeling old office building 200,000 200,000
Imputed interest on corporation’s own money used 120,000
during construction
Cash discounts on materials purchased 60,000 (60,000)
Supervision by management during construction 70,000 70,000
Compensation insurance premiums for workers 20,000 20,000
Payment of claim for injuries not covered by insurance 25,000
Clerical and other expenses during construction 30,000 30,000
Paving of streets and sidewalks 40,000
Plans and specifications 140,000 140,000
Legal cost of conveying land 10,000 10,000
Legal cost of injury claim 15,000
Saving on construction 200,000
1,310,000 900,000 5,800,000
1. What is the cost of the land?
a.1,310,000 b.1,300,000 c.1,350,000 d. 1,410,000
2. What is the cost of office building?
a.700,000 b.900,000 c.950,000 d.850,000
3. What is the cost of factory building?
a.5,720,000 b.5,800,000 c.5,920,000 d.5,600,000
Problem 2
Enchantment Company incurred the following expenditures related to land and building:
Land Building
Cash paid for land and dilapidated building 1,000,000 1,000,000
Removal of old building to make room for construction of a new 50,000 50,000
building
Payment to tenants for vacating old building 15,000 15,000
Architect fee for new building 200,000 200,000
Building permit for new construction 30,000 30,000
Fee for title search 10,000 10,000
Survey before construction of new building 20,000 20,000
Excavation before new construction 100,000 100,000
New building constructed 6,000,000 6,000,000
Assembly by city for drainage project 5,000 5,000
Cost of grading, leveling and landfill 45,000 45,000
Driveways and walks to new building from street (part of building 40,000 40,000
plan)
Temporary quarters for construction crew 80,000 80,000
Temporary building to house tools and materials 60,000 60,000
Cost of changes during construction to make new building more 50,000 50,000
energy efficient
Cost of windows broken by vandals 25,000
1,080,000 6,625,000
1. What is the cost of land?
a.1,145,000 b.1,215,000 c.1,130,000 d.1,080,000
2. What is the cost of new building?
a.6,625,000 b.6,575,000 c.6,585,000 d.6,560,000
MACHINERY
650,000
3,000,000
1,950,000
During the current year, Sunny company purchased a second-hand machine at a price of P3,200,000.
A cash payment of P500,000 was made and a two-year, non-interest bearing note was issued for the
balance.
Recent transactions involving similar machinery indicate that the used machine has a fair value of
P2,400,000. A new machine would cost P4,000,000.
The following costs were incurred during the year:
Cost of removing old machine that is replaced 30,000
Cash proceeds from sale of the old machine replaced 10,000
General overhaul and repairs to recondition machine prior to 150,000
use
Cost of spare parts to cover breakdowns 200,000
Cost of installation 80,000
Cost of testing machine prior to use 110,000
Cost of hauling machine from vendor to entity premises 10,000
Cost of repairing damage to machine caused when machine 30,000
was dropped during installation
Repairs incurred during first year of operations 90,000
Safety device added to the machine 250,000
Cost of training workers to operate the machine 20,000
What total amount should be capitalized as cost of the second hand machine?
a.3,000,000 b.2,750,000 c.3,200,000 d.3,800,000
Fair Value 2,400,000
Cost of removing old machine that is replaced 30,000
Cash proceeds from sale of the old machine replaced 10,000
General overhaul and repairs to recondition machine prior to 150,000 150,000
use
Cost of spare parts to cover breakdowns 200,000
Cost of installation 80,000 80,000
Cost of testing machine prior to use 110,000 110,000
Cost of hauling machine from vendor to entity premises 10,000 10,000
Cost of repairing damage to machine caused when machine 30,000
was dropped during installation
Repairs incurred during first year of operations 90,000
Safety device added to the machine 250,000 250,000
Cost of training workers to operate the machine 20,000
Cost of machinery 3,000,000
Pen Company incurred the following expenditures:
Painting partitions in a large room recently divided into four 50,000
sections
Labor cost of tearing down a wall to permit extension of an 200,000
assembly line
Major replacement of the motor of the machine. This 500,000
replacement was anticipated when the machine was purchased
Cost of grading land prior to construction 600,000
Dust filters in the of the factory were replaced. The new filters 800,000
are expected to reduce employee health hazards.
What total amount should be capitalized?
a.2,150,000 b.1,950,000 c.1,900,000 d.1,400,000
Painting partitions in a large room recently divided into four 50,000 50,000
sections
Labor cost of tearing down a wall to permit extension of an 200,000
assembly line
Major replacement of the motor of the machine. This 500,000 500,000
replacement was anticipated when the machine was purchased
Cost of grading land prior to construction 600,000 600,000
Dust filters in the of the factory were replaced. The new filters 800,000 800,000
are expected to reduce employee health hazards.
1,950,000
During the current year, Quest Company made the following expenditures relating to the plant building:
Continuing and frequent repairs 400,000
Repainting of the plant building 100,000
Major improvements to the electrical wiring system 30,000
Partial replacements of roof tiles 150,000
What total amount should be charged to repair and maintenance expense in the current year?
a.950,000 b.800,000 c.650,000 d.550,000
Continuing and frequent repairs 400,000 400,000
Repainting of the plant building 100,000 100,000
Major improvements to the electrical wiring system 30,000 capitalized
Partial replacements of roof tiles 150,000 150,000
Expensed 650,000
DEPRECIATION (STRAIGHT LINE AND VARIABLE METHOD)
16
1,625,000
What is the gain or loss from the derecognition of the asset on December 31, 2020
0
DEPRECIATION (SUM OF YEARS DIGIT AND DECLINING BALANCE)
On January 1, 2018, Mogul Company acquired equipment to be used in the manufacturing
operations. The equipment has an estimated useful life of 10 years and an estimated residual
value of P50,000.The depreciation applicable to this equipment was P240,000 for 2020
computed under the sum of years’ digits method. What was the acquisition cost of the
equipment?
1,700,000
Captive Company purchased a factory equipment on October 1, 2020 costing P960,000.In view
of pending technological developments it is estimated that the machine will have a resale value
upon disposal in four and one half years of P70,000 and the disposal cost will be P10,000. What
is the depreciation for 2020 using sum of years’ digits?
90,000
What is the depreciation for 2021 using sum of years’ digits?
320,000
Tarnish Company purchased equipment on January 1, 2020 for P5,000,000. The equipment
had an estimated 5-year useful life. The accounting policy for 5-year assets is to use the
200% double declining balance method for the first two years of the asset’s life and then
switch to straight line depreciation. On December 31, 2022, what amount should be reported
as accumulated depreciation? 3,800,000
Complacent Company purchased an equipment on January 1, 2020. The data are the
following: Cost 500,000; Residual value 50,000; and Useful life of 4 years. It is determined
that the fourth root of .10 is .5623.What is the depreciation for 2020 using declining balance
method? 218,850
DEPLETION
Compute the maximum dividend that can be declared. 2,100,000
In a journal entry to record the declaration of P2,000,000 dividends, how much should be
charged to Retained earnings? 1,500,000
At the beginning of current year, Vida Company purchased a mineral for P26,400,000 with
removable ore estimated at 1,200,000 tons.After it has extracted all the ore, the entity will be
required by law to restore the land to the original condition at an estimated cost of
P2,400,000. The present value of the estimated restoration cost is P1,800,000. The entity
believed it will be able to sell the property afterwards for P3,000,000.During the current year,
the entity incurred P3,600,000 of development costs preparing the mine for production and
removed 80,000 tons and sold 60,000tons of ore.What amount should be reported as
depletion for the current year? 1,920,000
Nice Corporation, one of the largest mining company, purchased 20 acres of land for
P60,000,000. The company expected to extract 5 million tons of mine from this land over the
next 20years at which time, residual value shall be P3,000,000. The following costs were also
incurred related to the mining activities: Successful exploration cost, 5,000,000 and cost of
P800,000 for dry wells. During the first 2 years of the mine’s operations, 300,000 tons were
mined each year and sold for P80 per ton.How much would be the depletion expense for the
first year? 3,720,000
