Q3 – PPE and Government Grant Problem Solving

Problem 1

On January 1, 2006, GGNANAMAN Corporation purchased a tract of land (site number 101) with a
building for P1,800,000. Additionally, GGNANAMAN paid a real estate broker’s commission of P108,000,
legal fees of P18,000 and the guarantee insurance of P54,000. The closing statement indicated that the
land value was P1,500,000 and the building value was P300,000. Shortly after acquisition, the building
was razed at a cost of P225,000.

QUESTION:

The cost of land site number 101 is P _

Answer: P2,205,000

Solution

Purchase Price P1,800,000

Broker’s fee 108,000
Legal fees 18,000
Insurance 54,000
Demolition Cost 225,000
Cost of Land P2,205,000

Problem 2

Laban Company owns a tract of land that it purchased in 2005 for P2,000,000. The land is held as a
future plant site and has a fair value of P2,800,000 on July 1, 2018. Bawi Company also owns a tract of
land held as a future plant site. Bawi paid P3,600,000 for the land in 2007 and the land has a fair value of
P3,800,000 on July 1, 2008. On this date, Laban exchanged its land and paid P1,000,000 cash for the land
owned by Bawi. The exchange had a commercial substance. At what amount should Laban record the
land acquired in exchange? P _

Answer: P3,800,000

Solution:

Land – Bawi P3,800,000

Cash P1,000,000
Land – Laban 2,800,000
Problem 3

Jungkook Company traded in its old computer for a new model. The following information is pertinent
to this transaction:
Cost of old computer P60,000
Accumulated Depreciation – computer (old) 20,000
Fair value of old computer 30,000
List price of new computer 80,000
Trade-in allowance for old computer 45,000

How much loss should be immediately recognized on the trade-in? P _

Answer: 10,000

Solution:

Computer (new) 30,000

Accum Dep 20,000
Loss 10,000
Computer (old) 60,000

Problem 4

BANGTAN Company uses many kinds of machines in its operations. It constructs some of these
machines itself and acquired others from the manufacturers. The following information relate to a
machine that it has recorded in 2007.
Cost of materials to construct machine, including VAT of P84,000 P784,000
Labor cost to construct machine 450,000
Allocated overhead costs – electricity, factory space, etc. 280,000
Costs of installation 100,000
Insurance taken during construction 16,000
Profit saved by self construction 80,000
Safety inspection costs prior to use 25,000

What is the cost of the machine? P _

Answer: P1,571,000

Solution:

Cost of Materials (except VAT) P700,000

Labor cost 450,000
Allocated OH costs 280,000
Installation cost 100,000
Insurance 16,000
Safety inspection costs 25,000
Cost of Machine P1,571,000
Problem 5

On December 31, 2009, Hayst Company shows the following account for machinery it had assembled for
its own use during 2009:

Item Debit Credit

Cost of dismantling old machine P14,480
Cash proceeds from sale of old machine P12,000
Raw materials used in construction of new machine 76,000
Labor on construction of new machine 49,000
Cost of installation 11,200
Materials spoiled in machine trial runs 2,400
Profit on construction 24,000
Purchase of machine tools 13,000

An analysis of the details in the account disclosed the following:

a. The old machine, which was removed before the installation of the new one, had been fully
depreciated.
b. Cash discounts received on the payments for materials used totaled P3,000, and these were
reported in the purchase discounts account.
c. The factory overhead account shows a balance of P292,000 for the year ended December 31,
2009; this balance exceeds normal overhead on regular plant activities by approximate P16,900
and is attributable to machinery.
d. A profit was recognized on construction for the difference between costs incurred and the price
at which the machine could have been purchased.

The adjusted cost of the machinery is P _

Answer: P152,500

Solution:

Raw materials used in construction of new machine P76,000

Labor on construction of new machine 49,000
Cost of installation 11,200
Materials spoiled in machine trial runs 2,400
Cash discounts received (3,000)
Factory overhead 16,900
Adjusted Cost of Machinery P 152,500
Problem 6

Aling Vicky Company and Mareng Lidia Company are fuel oil distributors. To facilitate the delivery of oil
to customers, Aling Vicky and Mareng Lidia exchanged ownership of 1,000 barrels of oil without
physically moving the oil. Aling Vicky paid Mareng Lidia P1,500,000 to compensate for a difference in the
grade of oil. It was reliably determined that the exchange lacks commercial substance because the
configuration of the cash flows of the asset received does not differ from the configuration of the cash
flows of the asset transferred. On the date of exchange, cost and fair value of oil were:

Aling Vicky Company Mareng Lidia Company

Cost P5,000,000 P6,000,000
Fair value 7,000,000 8,500,000

Aling Vicky should record the oil inventory received in exchange at P _

Answer: P6,500,000

Solution:

Lacks commercial substance. Use Carrying amount.

Carrying Amount of the asset given up P5,000,000

Cash paid 1,500,000
Asset to be debited P6,500,000

Problem 7

On January 1, 2007, Lodi Company purchased a tract of land with an old building which was razed
shortly after acquisition. The costs incurred in connection with the acquisition were:

Purchase price P3,000,000

Agent commission 100,000
Legal fees for the purchase contract 50,000
Guarantee insurance 10,000
Cost of razing the old building 150,000
Salvage value of old building materials 25,000
Property taxes for 2006 and 2007 (equally each year) 100,000
Option paid for an alternative land which was not acquired 30,000
Cost of relocating squatters 50,000

The cost of the land should be P _

Answer: P3,385,000
 Solution:

Purchase price P3,000,000

Agent commission 100,000
Legal fees for the purchase contract 50,000
Guarantee insurance 10,000
Cost of razing old building 150,000
Salvage value of old building materials (25,000)
Property taxes for 2006 only (unpaid) 50,000
Cost of relocating squatters 50,000
Cost of the Land P3,385,000

Problem 8

Amelia Company has decided to expand its operations and has purchased land in the city for
construction of a new manufacturing plant. The following costs were incurred in purchasing the
property and constructing its building:

Land Purchase Price P2,500,000

Payment for delinquent property taxes 100,000
Title search and insurance 50,000
Special assessment for city improvements on water and sewer 150,000
Building permit 30,000
Cost to destroy existing building on land (P10,000 worth of salvaged material 60,000
used in new building)
Contract cost of new building 7,000,000
Architect’s fee 200,000
Sidewalk and parking lot (not part of the original blueprint) 100,000
Fire insurance on building – 1 year 40,000

QUESTIONS:
1. The cost of the land is P _
2. The cost of the building is P _

Answer:
1. P2,800,000
2. P7,290,000

Solution:
Land purchase price P2,500,000 Building permit P30,000
Payment for unpaid taxes 100,000 Cost to destroy building 50,000
Title search and insurance 50,000 Contract cost of new building 7,000,000
Special assessment 150,000 Architect’s fee 200,000
Salvaged materials used in new bldg 10,000
Land P2,800,000 Building P7,290,000
Problem 9

On January 1, 2018, Carmilla Company received a grant of P50 million from the British government in
order to defray safety and environmental costs within the area where the enterprise is located. The
safety and environmental costs are expected to be incurred over four years, respectively, P4 million, P8
million, P12 million and P16 million.

How much income from the government grant should be recognized in 2018? P_

Answer: P5,000,000

Solution:

Environmental Costs:
Year 1 P4 million
Year 2 8 million
Year 3 12 million
Year 4 16 million
Total P40 million

Grant P50 million x 4/40 = P5,000,000 income for 2018.

Problem 10

On July 1, 2017, Malaya Kana Company is granted a large tract of land in the Cordillera region by the
Philippine government. The fair value of the land is P10 million. Malaya Kana Company is required by
the grant to construct chemical research facility and employ only personnel residing in the Cordillera
region. The estimated cost of the facility is P50 million with useful life of 20 years. The facility was
completed in early 2018. Malaya Kana Company should recognize in 2018 an income from government
grant at P _

Answer: P500,000

Solution:

Grant P10,000,000 divided by 20 years = P500,000 for year 2018.

Problem 11

On January 1, 2017, Armin Company received a grant of P50 million from a foreign government for the
construction of a laboratory and research facility with an estimated cost of P60 million and useful life of
25 years. The facility was completed in early 2018. Company policy is to treat the grant as a reduction in
the cost of the asset. What should be the depreciation expense in respect of this facility for the year
ended December 31, 2018 assuming the depreciation is calculated on a straight line basis? P _
Answer: P400,000

Solution:

Research Facility P60 million – P50 million = 10,000,000 divided by 25 years = P400,000

Problem 12

Novachrono Inc. granted a parcel of land by a local government authority. The condition attached to this
grant was that Novachrono Inc. should clean up this land and lay roads by employing laborers from the
village in which the land is located. The entire operation will take three years and is estimated to cost
P100 million. This amount will be spent in this way: P20 million each in the first and second years and
P60 million in the third year. The fair value of this land is currently P120 million.

How much should be recognized as income from government grant at the end of the first year? P _

Answer: P24,000,000

Solution:

Grant (based on the fair value) P120 million x 20/100 = P24,000,000

Problem 13

A public limited company, Eks Dairy Products, produces milk on its farms. The company has had
problems during 2018. Contaminated milk was sold to customers. As a result, milk consumption has
gone down. The government decided to compensate farmers for potential loss in revenue from sale of
milk. This fact was published in the national press on December 1, 2018. Eks received an official letter on
December 15, 2018, stating that P1 million would be paid to it on April 3, 2019.

The entity should recognize income from grant of:

a. P1 million on December 1, 2018
b. P1 million on December 15, 2018
c. P1 million on April 3, 2019
d. Nil

Answer: C
Problem 14

Glen Inc. and Armstrong Co. have an exchange with no commercial substance. The asset given up by Glen
Inc. has a book value of P12,000 and a fair market value of P15,000. The asset given up by Armstrong Co.
has a book value of P20,000 and a fair market value of P19,000. Boot of P4,000 is received by Armstrong
Co.

QUESTIONS:
1. What amount should Glen Inc. record for the asset received? P _
2. What amount should Armstrong Co. record for the asset received? P _

Answer:

1. P16,000
2. P15,000

Solution:

1. P12,000 + P4,000 = P16,000

2. P15,000 (fair market value)

Problem 15

On January 2, 2010, Mini Corp. replaced its major part with a more efficient one. The following
information was available on that date:

Purchase price of the major part P200,000

Carrying amount of old part 20,000

Fair value of old part 6,000

Installation cost of new major part 50,000

The old part was sold for P7,000. What amount should Mini capitalize as the cost of the new
part? P _

Answer: P250,000

Solution: 200,000 + 50,000 = 250,000