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Accounting Review, Part One (Acc-rev1) De La Salle Lipa

Module 3
PROPERTY, PLANT, AND EQUIPMENT

1. (Loftus et. at.; Ocampo/PRTC) Harrier Co. began operations on July 1, 2019. During the following
year, the company acquired a tract of land, demolished the building on the land and built a new
factory. Equipment was acquired for the factory and, in March 2020, the factory was ready. A gala
opening was held on March 18, with the local parliamentarian opening the factory. The first items
were ready for sale on March 25. During this period, the following inflows and outflows occurred.
a. While searching for a suitable block of land, Harrier Ltd placed an option to buy with
three real estate agents at a cost of P100 each. One of these blocks of land was
later acquired.
b. Payment of option fees P 300
c. Receipt of loan from bank 400,000
d. Payment to settlement agent for title search, stamp duties and settlement fees 10,000
e. Payment of arrears in rates on building on land 5,000
f. Payment for land 100,000
g. Payment for demolition of current building on land 12,000
h. Proceeds from sale of material from old building 5,500
i. Payment to architect 23,000
j. Payment to council for approval of building construction 12,000
k. Payment for safety fence around construction site 3,400
l. Payment to construction contractor for factory building 240,000
m. Payment for external driveways, parking bays and safety lighting 54,000
n. Payment of interest on loan 40,000
o. Payment for safety inspection on building 3,000
p. Payment for equipment 64,000
q. Payment of freight and insurance costs on delivery of equipment 5,600
r. Payment of installation costs on equipment 12,000
s. Payment for safety fence surrounding equipment 11,000
t. Payment for removal of safety fence 2,000
u. Payment for new fence surrounding the factory 8,000
v. Payment for advertisements in the local paper about the forthcoming factory and its 500
benefits to the local community
w. Payment for opening ceremony 6,000
x. Payments to adjust equipment to more efficient operating levels subsequent to initial 3,300
operation
Required: Using the information provided, determine what assets (land, land improvements, building,
and equipment) Harrier Co. should recognize and the amounts at which they would be recorded.

a. Payment of option fees P 100


Payment to settlement agent for title search, stamp duties and settlement fees 10,000
Payment for land 100,000
Land P110,100

b. Payment for external driveways, parking bays and safety lighting P 54,000
Payment for new fence surrounding the factory 8,000
Land Improvements P 62,000

c. Payment of arrears in rates on building on land P 5,000


Payment for demolition of current building on land 12,000
Proceeds from sale of material from old building (5,500)

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Accounting Review, Part One (Acc-rev1) De La Salle Lipa

Payment to architect 23,000


Payment to council for approval of building construction 12,000
Payment for safety fence around construction site 3,400
Payment to construction contractor for factory building 240,000
Payment for safety inspection on building 3,000
Payment for removal of safety fence 2,000
Building P294,900

d. Payment for equipment P 64,000


Payment of freight and insurance costs on delivery of equipment 5,600
Payment of installation costs on equipment 12,000
Payment for safety fence surrounding equipment 11,000
Payments to adjust equipment to more efficient operating levels subsequent
to initial operation 3,300
Equipment P 92,600

* The payment of the remaining option fees, payment of interest on loan (since it was not generally
or specifically used for building construction), payment for advertisements in the local paper about
the forthcoming factory and its benefits to the local community, and payment for opening
ceremony are considered as outright expenses. The receipt of loan from bank, on the other hand,
is a cash receipt and is considered an outstanding loan receivable.

2. (Valix) Rolex Co., new formed entity, incurred the following expenditures related to land and building.
Cash paid for land and dilapidated building P1,000,000
Removal of old building 50,000
Payment of tenants for vacating old problem 15,000
Architect fee for new building 200,000
Building permit for new construction 30,000
Fee for title search 10,000
Survey before construction of new building 20,000
Excavation before new construction 100,000
New building constructed 6,000,000
Assessment by City for drainage project 5,000
Cost of grading, leveling and landfill 45,000
Driveways and walks to new building from street (part of building plan) 40,000
Temporary quarters for construction crew 80,000
Temporary building to house tools and materials 60,000
Cost of changes during construction to make new building more energy efficient 50,000
Cost of windows broken by Vandals 25,000
Cost of trees shrubs and other landscaping 70,000
New fence surrounding the building 200,000
Required: Compute the cost of the following: (a) Land, (b) Land Improvements, and (c) Building.

a. Cash paid for land and dilapidated building P1,000,000


Fee for title search 10,000
Survey before construction of new building 20,000
Assessment by City for drainage project 5,000
Cost of grading, leveling and landfill 45,000
Land P2,160,000

c. Cost of trees shrubs and other landscaping P 70,000


New fence surrounding the building 200,000

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Accounting Review, Part One (Acc-rev1) De La Salle Lipa

Land improvements P 270,000

c. Removal of old building P 50,000


Payment of tenants for vacating old problem 15,000
Architect fee for new building 200,000
Building permit for new construction 30,000
Excavation before new construction 100,000
New building constructed 6,000,000
Driveways and walks to new building from street (part of building plan) 40,000
Temporary quarters for construction crew 80,000
Temporary building to house tools and materials 60,000
Cost of changes during construction to make new building more energy efficient 50,000
Building P6,625,000

* The cost of windows broken by Vandals is considered as an outright expense.

3. (Loftus et at.; Kieso et al.; PRTC) Magpie Co. uses many kinds of machines in its operations. It
constructs some of these machines itself and acquires others from the manufacturers. The following
information relates to two machines that it has recorded in the 2020–21 period. Machine A was
acquired, and Machine B was constructed by Magpie Co. itself.

Machine A
Cash paid for equipment, including VAT of P8,000 P88,000
Costs of transporting machine — insurance and transport 3,000
Labor costs of installation by expert fitter 5,000
Labor costs of testing equipment 4,000
Insurance costs for 2020–21 1,500
Costs of training for personnel who will use the machine 2,500
Costs of safety rails and platforms surrounding machine 6,000
Costs of water devices to keep machine cool 8,000
Costs of adjustments to machine during 2020–21 to make it operate more efficiently 7,500

Machine B
Cost of material to construct machine, including VAT of P7000 P77,000
Labor costs to construct machine 43,000
Allocated overhead costs — electricity, factory space etc. 22,000
Allocated interest costs of financing machine 10,000
Costs of installation 12,000
Insurance for 2020–21 2,000
Profit saved by self-construction 15,000
Safety inspection costs prior to use 4,000

Required: Determine the amount at which each of these machines should be recorded in the records
of Magpie Co. For items not included in the cost of the machines, note how they should be accounted
for.

a. Cash paid for equipment (excluding VAT of P8,000) P 80,000


Costs of transporting machine — insurance and transport 3,000
Labor costs of installation by expert fitter 5,000
Labor costs of testing equipment 4,000
Costs of safety rails and platforms surrounding machine 6,000
Costs of water devices to keep machine cool 8,000

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Accounting Review, Part One (Acc-rev1) De La Salle Lipa

Costs of adjustments to machine during 2020–21 to make it operate more efficiently 7,500
Cost of Machine A P178,500

b. Cost of material to construct machine (excluding VAT of P7,000) P 70,000


Labor costs to construct machine 43,000
Allocated overhead costs — electricity, factory space etc. 22,000
Allocated interest costs of financing machine 10,000
Costs of installation 12,000
Safety inspection costs prior to use 4,000
Cost of Machine B P161,000

* Insurance costs and costs of training for personnel who will use the machine are considered as
outright expenses. VAT is ignored since it is recoverable. Profit saved by self-construction is also
ignored since fixed assets are recorded at cost and any difference between the cost and the fair
value is not capitalized.

4. (Valix) During the current year, Marjorie Company purchased a second hand machine at a price of
P5,000,000. A cash payment of P 1,000,000 was made and a two-year, non-interest bearing note
was issued for the balance of P 4,000,000. Recent transactions involving similar machine indicate
that the used machine has a second hand market value of P 4,500,000. A new machine would cost
of P 6,500,000. The following costs were incurred during the year.
Cost of removing old machine that is replaced P350,000
Cash proceeds from the sale of the old machine replaced 100,000
Cost of hauling the machine from vendor to entity premises 40,000
General overhaul and repairs to recondition machine prior to use 220,000
Cost of installation 180,000
Cost of testing machine prior to use 150,000
Safety device added to the machine 300,000
Cost of spare parts to cover breakdowns 80,000
Costs of repairing damage to machine caused when the machine was dropped
during installation 50,000
Repairs incurred during the first year of operation 160,000
Cost of training workers to operate the machine 25,000
Required: Compute the cost of the second hand machine.

Market value of the machine P4,500,000


Cost of hauling the machine from vendor to entity premises 40,000
General overhaul and repairs to recondition machine prior to use 220,000
Cost of installation 180,000
Cost of testing machine prior to use 150,000
Safety device added to the machine 300,000
Machine P5,390,000

* The cost of removing old machine that is replaced, cost of spare parts to cover breakdowns,
costs of repairing damage to machine caused when the machine was dropped during installation,
repairs incurred during the first year of operation, and cost of training workers to operate the
machine are considered as outright expenses. They are not capitalized since they do not prolong
the life of the machine nor improve its performance. The cash proceeds from the sale of the old
machine replaced is also ignored in the computation of the machine cost since the transaction is
a sale and not an exchange of assets.

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Accounting Review, Part One (Acc-rev1) De La Salle Lipa

5. (Kieso et al.) Santana Company exchanged equipment used in its manufacturing operations plus
P2,000 in cash for similar equipment used in the operations of Delaware Company. The following
information pertains to the exchange.
Santana Co. Delaware Co.
Equipment (cost) P28,000 P28,000
Accumulated depreciation 19,000 10,000
Fair value of equipment 13,500 15,500
Cash given up 2,000
Required: Compute the gain or loss that should be recorded by (a) Santana Company and (b)
Delaware Company.

Santana Company

Journal entry: Equipment (P13,500 + P2,000) 15,500


Accumulated depreciation 19,000
Gain on exchange of equipment* 4,500
Equipment 28,000
Cash 2,000

* Gain = Fair value of asset give up– Carrying value of equipment


= P13,500– (P28,000 – P19,000) = P4,500

Delaware Company

Journal entry: Equipment (P15,500 + P2,000) 13,500


Cash 2,000
Accumulated depreciation 10,000
Loss on exchange of equipment* 2,500
Equipment 28,000

* Loss = Fair value of asset give up– Carrying value of equipment


= P15,500 – (P28,000 – P10,000) = P(2,500)

6. (IFRS; Valix) ABC Company had the following general borrowings during 2018 which were used to
finance the construction of the entity’s new building:
Principal Borrowing cost
10% bank loan P2,800,000 P280,000
10% short-term note 1,600,000 160,000
12% long-term loan 2,000,000 240,000
P6,400,000 P680,000
The construction began on January 1, 2018 and the building was completed on December 31, 2018.
In the first phase of the construction, there were idle funds which the entity invested and earned
interest income of P100,000. Expenditures on the building were made as follows:
January 1 P 400,000
March 31 1,000,000
June 30 1,200,000
September 30 1,000,000
December 31 400,000
Required: Compute the capitalizable borrowing cost at December 31, 2018.

Since general borrowings were used to finance the building construction, we can capitalize a portion
of the borrowing cost. First, we need to compute the weighted average accumulated expenditure.

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Accounting Review, Part One (Acc-rev1) De La Salle Lipa

One option to compute this is to multiply the actual expenditure with the weighted duration (from the
time of expenditure until the balance sheet date or the date of completion of the asset, whichever
comes first).

Date Actual Expenditure Weighted Duration Weighted Average Expenditure


January 1 P 400,000 12/12 P 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
Weighted average accumulated expenditure P2,000,000

Another option is to multiply the accumulated expenditure with the weighted duration within the
intervening period.

Date Accumulated Expenditure Weighted Duration Weighted Average Expenditure


January 1 P 400,000 3/12 P 100,000
March 31 1,400,000 3/12 350,000
June 30 2,600,000 3/12 650,000
September 30 3,600,000 3/12 900,000
Weighted average accumulated expenditure P2,000,000

Since there are no specific borrowings, we will multiply the weighted average accumulated
expenditure with the interest rate or the average borrowing cost.

Amount Interest rate Interest


Expenditure financed by general borrowings P2,000,000 10.625%** P212,500

** Average interest rate on general borrowings = Actual borrowing costs / Total principal = P680,000
/ P6,400,000 = 10.625%

Before we capitalize the borrowing cost of P212,500, this amount should not exceed the actual
borrowing for the year. Since the actual borrowing cost is P680,000, then we can capitalize
P212,500.

7. (Kieso) McPherson Furniture Company started construction of a combination office and warehouse
building for its own use at an estimated cost of P5,000,000 on January 1, 2018. McPherson expected
to complete the building by December 31, 2018. McPherson has the following debt obligations
outstanding during the construction period.
Construction loan—12% interest, payable semiannually, issued December 31,
2017 P2,000,000
Short-term loan—10% interest, payable monthly, and principal payable at
maturity on May 30, 2019 1,600,000
Long-term loan—11% interest, payable on January 1 of each year. Principal
payable on January 1, 2022 1,000,000
Assume that McPherson completed the office and warehouse building on December 31, 2018, as
planned at a total cost of P5,200,000, and the weighted-average accumulated expenditures was
P3,800,000. Compute the total cost of the office and warehouse building. (Carry all computations to
two decimal places.)

Before proceeding with the computation, we must first separate the specific borrowing from the
general borrowing and then compute the interest for the year (from the time of expenditure until the
balance sheet date or the date of completion of the asset, whichever comes first)

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Accounting Review, Part One (Acc-rev1) De La Salle Lipa

Loan Principal Interest rate Interest


Specific borrowing (construction loan) P2,000,000 12% P240,000
General borrowing
Short-term loan 1,600,000 10% 160,000
Long-term loan 1,000,000 11% 110,000
Total P4,600,000 P510,000

Next, allocate the weighted average accumulated expenditure, first using the specific borrowings and
then the remainder using the general borrowings

Expenditure Interest rate Interest


Expenditure financed by specific borrowings P2,000,000 12% P240,000
Expenditure financed by general borrowings 1,800,000 10.38%** 186,840
Total P3,800,000 P426,840

** Average interest rate on general borrowings = Actual borrowing costs / Total principal =
(P160,000 + P110,000) / (P1,600,000 + P1,100,000) = 10.625%

8. (Kieso et al. Adapted) Alladin Company purchased Machine #201 on April 1, 2018. The following
information relating to Machine #201 was gathered at the end of May.
Price P85,000
Credit terms 2/10, n/30
Freight-in costs P800
Preparation and installation costs P4,900
Labor costs during regular production operations P10,500
It is estimated that the machine will have a P5,000 residual value at the end of its service life. Its
service life is estimated at 8 years; its total working hours are estimated at 42,000 and its total
production is estimated at 525,000 units. During 2015, the machine was operated 6,000 hours and
produced 55,000 units. During 2016, it was operated 5,500 hours and produced 48,000 units.
Required:
a. Compute depreciation expense on the machine for the year ending December 31, 2018 and the
year ending December 31, 2019 and the accumulated depreciation at December 31, 2019, using
the following methods: (1) straight-line; (2) units-of-output; (3) working hours, (4) sum-of-the-
years’-digits; and (5) double-declining-balance.
b. Assume that Machine #201 was sold for P60,000 on December 31, 2019, compute the gain or
loss from the derecognition of the asset.

9. (Nikolai et al.) On January 1, 2018, the Emming Corporation purchased some machinery. The
machinery has an estimated life of 10 years and an estimated residual value of P5,000. The
depreciation on this machinery was P20,000 in 2020.
Required: Compute the acquisition cost of the equipment under the following depreciation methods:
(a) straight-line; (b) sum-of-the-years’-digits, and (c) double-declining-balance.

10. (Nikolai et al.) The Wilcox Company acquires four machines that have the following characteristics:
Estimated Estimated
Machine Cost Residual Value Service Life
A P26,000 P2,000 6 years
B 19,000 1,000 9 years
C 30,000 5,000 5 years
D 28,000 — 7 years

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Accounting Review, Part One (Acc-rev1) De La Salle Lipa

Required:
a. Compute the the first year’s depreciation, assuming that the composite method is used on a
straight-line basis.
b. If the company sells machine B after four years for P10,000, compute the gain or loss from the
derecognition of the asset.

11. (AICPA; Valix et al.) Weir Co. uses straight-line depreciation for its property, plant, and equipment,
which, stated at cost, consisted of the following:
December 31, 2018 December 31, 2017
Land P 25,000 P 25,000
Buildings 195,000 195,000
Machinery and equipment 695,000 650,000
Total 915,000 870,000
Less: Accumulated depreciation 400,000 370,000
Total P515,000 P500,000
Weir’s depreciation expense for December 31, 2018 and December 31, 2017 was P55,000 and
P50,000, respectively.
Required: Compute the amount debited to accumulated depreciation during December 31, 2018
because of property, plant, and equipment retirements.

12. (AICPA; Valix et al.) Turtle Co. purchased equipment on January 2, 2018, for P50,000. The
equipment had an estimated five-year service life. Turtle's policy for five-year assets is to use the
double-declining depreciation method for the first two years of the asset's life, and then switch to the
straight-line depreciation method.
Required: In its December 31, 2020, balance sheet, compute the amount that Turtle should report as
accumulated depreciation for equipment.

13. (Kieso et al.) Machinery purchased for P52,000 by Carver Co. in 2013 was originally estimated to
have a life of 8 years with a residual value of P4,000 at the end of that time. Depreciation has been
entered for 5 years on this basis. In 2018, it is determined that the total estimated life should be 10
years with a residual value of P4,500 at the end of that time. Assume straight-line depreciation.
Required: Compute the amount that Machinery should debited to accumulated depreciation for 2018.

14. (Valix et al.) Carmel Company provided the following information with respect to a building.
 The building was acquired January 1, 2013 at a cost P7,800,000 with an estimated useful life of
40 years and residual value of P200,000. Yearly depreciation was computed on the straight line
method.
 The building was renovated on January 1, 2015 at a cost of P760,000. This was considered as
improvement. Residual value did not change.
 On January 1, 2018, the management decided to change the total life of the building to 30 years.
Required: Compute the amount to be reported as depreciation of the building for 2018?

15. (Valix et al.) In 2016, Lepanto Mining Company purchased property with natural resources for
P28,000,000. The property had a residual value of P5,000,000. However, the company is required to
restore the property to its original condition for P2,000,000. In 2016, Lepanto spent P1,000,000 in
development costs and P3,000,000 in buildings on the property. Lepanto does not anticipate that the
buildings will have utility after the natural resources are removed. In 2017, an amount of P1,000,000
was spent for additional development on the mine. The tonnage mined and estimated remaining tons
for years 2010 to 2012 are as follows:
Tons extracted Tons remaining
2016 0 10,000,000
2017 3,000,000 7,000,000

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Accounting Review, Part One (Acc-rev1) De La Salle Lipa

2018 3,500,000 2,000,000


Required: Compute the amount that the company should recognize as depletion for 2018.

16. (Valix et al.) ABC Company provides the following balances at the end of 2018:
Wasting asset, at cost P80,000,000
Accumulated depletion 20,000,000
Retained earnings 10,000,000
Capital liquidated 15,000,000
Depletion based on 100,000 units extracted at P50 per unit 5,000,000
Inventory of resource deposit (20,000 units) 2,000,000
Compute for the maximum amount of dividend that ABC can declare on December 31, 2018.

17. (Kieso et al.) Presented below is information related to equipment owned by Pujols Company at
December 31, 2018.
Cost P9,000,000
Accumulated depreciation to date 1,000,000
Value-in-use 7,000,000
Fair value less cost of disposal 4,400,000
Assume that Pujols will continue to use this asset in the future. As of December 31, 2018, the
equipment has a remaining useful life of 4 years.
Required:
a. Compute the amount that should be reported as impairment loss for the year.
b. Assume that the recoverable amount of the equipment at December 31, 2018, is €6,000,000.
Compute the amount that should be reported as gain on reversal of impairment that should be
reported in the income statement for 2018.