PROPERTY, PLANT AND EQUIPMENT

PROBLEM 1

On December 31, 2019, Bessy Co. purchased a machine in exchange for a noninterest bearing note
requiring eight payments of P200,000. The first payment was made on December 31, 2019 and the
others are due annually on December 31. At date of issuance, the prevailing rate of interest for this type
of note was 11%.

PV of ordinary annuity of 1 at 11% for 8 periods 5.146

PV of annuity of 1 in advance at 11% for 8 periods 5.712

REQUIRED:

1. What amount should be recorded as initial cost of the machine?

2. What is the discount on note payable on December 31, 2019?
3. What is the interest expense for 2020?
4. What is the carrying amount of the note payable on December 31, 2020?

PROBLEM 2

Nevada Company had the following property acquisitions during the current year:

 Acquired a tact of land in exchange for 50,000 shares of Nevada with P100 par value that had a
market price of P120 per share on the date of acquisition. The last property tax bill indicated
assessed value of P2,400,000 for the land.
 Received land from a major shareholder as an inducement to locate plant in the city. No
payment was required but the entity paid P50,000 for legal expenses for land transfer. The land
is fairly valued at P1,200,000.

What us the total increase in land as a result of the acquisition?

PROBLEM 3

The following information relates to Piano Company.

a) On July 1, Piano purchased the plant assets of Ayokona Co., which had discontinued operations.
The following are the fair values of the plant assets acquired:

Land 10,500,000
Building 31,500,000
Machinery and equipment 21,000,000
TOTAL 63,000,000
Piano issued 550,000 shares of its P100 par value ordinary share capital in exchange for the above plant
assets. On the acquisition date, the stock had a fair value of P160 per share.

b) Piano expended the following amounts in cash between July 1 and December 20, the date when
the company first occupied the building:

Special assessment by city on land 540,000

Repairs on the building 3,150,000
Construction of bases for machinery and
equipment acquired 4,050,000
Driveways and parking lots 3,660,000
Remodeling of office space in buildings,
including new partitions and walls 4,830,000

c) On December 23, Piano paid cash for machinery, P7,800,000, subject to a 2% cash discount, and
freight on machinery of P315,000.

REQUIRED:

Based on the preceding information, calculate the cost of each of the following PPE items:

1. Land
2. Buildings
3. Machinery and equipment
4. Land improvements
5. The entry to record the purchase of Ayokona’s plant assets

PROBLEM 4

Perry, Inc. completed the following transactions during 2020:

Jan 1 Purchased real property for P318,847,500, which included a charge of P547,500 representing
property tax for the current year that had been prepaid by the vendor. Of the total purchase
price, 20% is determined to be applicable to land and the balance to buildings. A mortgage of
P11,250,000 was assumed by Perry on the purchase. Cash was paid for the balance.

Feb 5 Perry expended P888,000 to recondition the building because previous owners had neglected
the normal maintenance and repair requirements on the building.

May 20 The garage in the rear of the building was demolished, P135,000 being recovered on the salvage
materials. Perry immediately constructed a warehouse. The cost of such construction was
P2,028,000, which was not materially different from the bids made on the construction by
independent contractors. Upon completion of the construction, city inspectors discovered that
Perry failed to comply with the building safety code and thus ordered the company to make
extensive modifications to the warehouse. The cost of such modifications, which could have
been avoided, was P288,000.
June 1 The company acquired new machine in exchange for its own ordinary shares with a market
value of P600,000 (par P90,000). The new machine has a market value of P750,000.

July 1 Another machine was acquired by Perry. Payment was made by issuing bonds with a face value
of P1,500,000 and by paying cash of P540,000. The machine’s fair value is P1,950,000.

Nov 20 On September 1, the company engaged an independent contractor for parking lots and
landscaping at a cost of P1,638,000. The work was completed and paid for on November 20.

Prepare all necessary journal entries for various PPE transactions.