Chapter 5: Audit of Property, Plant & Equipment

Chapter 5: Audit of Property, Plant & Equipment
AUDIT PROGRAM
FOR PROPERTY, PLANT AND EQUIPENT
Audit Objectives
To determine that:
1. All property, plant and equipment on the statement of

financial position (including assets that are leased under
finance leases) are:
a. Owned by the entity; and
b. Held by the entity or by the others for the entity.
2. All property, plant and equipment owned or leased under
finance leases by the entity at year-end are included on the
statement of financial position.
3. Property, plant and equipment are required at the
appropriate amount.
4. The cost of property, plant and equipment is allocated to
the appropriate accounting periods in a systematic and
rational manner.
5. Impaired property, plant and equipment are recorded at
estimated recoverable value.
6. Property, plant and equipment held for disposal are carried
at the lower of their carrying amount or fair value less
cost to sell.
7. property, plant and equipment and related accounts are
property described and classified In the financial
statements, including notes, in conformity with PFRS
Audit Procedures:
EXAMINATION OF OPENING BALANCES
1. For a recurring engagement:

 Trace opening balances in last year
2. For a initial audit where the previous years were audited
 Vouch significant transactions to ascertain:
o Authentication
o Property of accounting
o Accounting principles applied
 Obtain permission from the client to refer to the
working papers of the predecessor auditor.
 Vouch documents evidencing ownership
3. For an initial audit where the previous years were
unaudited:
 To the extent necessary to form an opinion on the
accuracy of the opening balances, vouch significant
transactions to ascertain:
o Authentication
o Property of accounting
o Accounting principles applied
 Vouch documents evidencing ownership.
EXAMINATION OF CURRENT YEAR TRANSACTIONS
1. Obtain or prepare schedules of the property, plant and

equipment and:
 Check footings and cross-footings
 Determine if the schedules are in agreement with the
general ledger control accounts.
 Trace individual balances to the detailed records or
property cards.
 Consider physical inspection of significant items.
2. For acquisitions or debits to property, plant and equipment
accounts
 Determine authorization by examining invoices, capital
expenditure authorizations, leases, and other evidence
(e.g., in-house construction work orders) supporting
additions to property, plant and equipment during the
period.
 Test calculations of capitalized interest to determine
the appropriateness of rates, amounts, and
capitalization periods used.
 Ascertain the business reasons for unusual additions
3. For disposals or credits to property, plant and equipment
accounts:
 Examine authorizations and other data supporting
retirements, sales, and other disposals of property,
plant and equipment items
 Test the computations of the resulting gains and losses
 Determine that the assets disposed of ad the related
accumulated depreciation have been properly
derecognized
 Ascertain the business reasons for unusual disposals
4. For impaired property, plant and equipment
 Determine whether property, plant and equipment
identified indications of impairment
 Determine that the methods and assumptions used by
management in estimating recoverable value are
reasonable
 Ascertain if the impairment was properly recorded
5. Examine lease contracts to determine whether leases are
properly classified as finance or operating and determine
whether the proper accounting has been performed and
appropriate disclosures have been made.
6. Examine support for significant charges to repairs,
maintenance, and other expense accounts in determine if they
should be capitalized to property, plant and equipment
7. Test computations of depreciation, depletion and
amortization to determine the appropriateness of the methods
and estimated lives used. Determine if they are consistent
with the methods and lives used in prior periods
8. Review minutes of meetings, legal documents, and other
evidence for evidence of liens, pledges, and restrictions on
property, plant and equipment
9. Search for unrecorded retirement by:
 Examination of cash receipts, tax declarations,
insurance records, credits to scrap sales, and
inquiry of knowledgeable company personnel
 A tour of the company plant to observe indications
of equipment removals
10. Identify properties that are:
 Idle
 No longer in use
 Obsolete
and determine proper accounting recognition.
11. Reconcile payments to government for taxes and

registration fees with recorded assets.
12. Ascertain that fully depreciated assets still in use or
those that are held for sale are not further depreciated.
13. Determine and discuss with appropriate official, the
adequacy of insurance coverage.
14. Determine that property, plant and equipment that are
being held for disposal are carried at appropriate amounts.
15. Determine property of financial statement presentation
and adequacy of disclosures.
PROBLEM 5-1
Correction of Improper property, plant and equipment (PPE)

Acquisition Entries
The following are PPE acquisitions for selected companies:
1. FRENCH HORN COMPANY acquired land, buildings, and equipments

from a financially distressed company, Bankrupt Corp., for a
lump sum price of P2,800,000. On the acquisition date,
Bankrupt’s assets had the following book and fair values:
Book Fair
Values Values
Land P 800,000
P 600,000
Buildings 1,000,000
1,400,000
Equipment 1,200,000
1,200,000
French Horn decided to take a conservative position by recording
the lower of the two values for each PPE item acquired. The
following entry was made.
Land 600,000
Buildings 1,000,000
Equipment 1,200,000
Cash 2,800,000
2. TRUMPET, INC. purchased factory equipment by making a

P200,000 cash down payment and signing a 3-year P300,000,
10% note payable. The acquisition was recorded as follows:
Factory equipment 530,000

Cash 200,000
Note payable 300,000
Interest payable 30,000
3. TUBA CO purchased store equipment for P800,000, terms 2/15,

R/30. The company took the discount and made the following
terms when it paid for the acquisition
Store equipment 800,000

Cash 784,000
Purchase discount 16,000
4. FLUTE CORP. constructed a building at a total cost of

P45,000,000. The building could have been purchased
P43,000,000. The company’s comrades made the following
entry:
Building 45,000,000
Cash 43,000,000
Profit on construction 2,000,000
Prepare the necessary correcting entry for each acquisition.
SOLUTION 5-1
CORRECTING ENTRIES
(on acquisition date)
1. Buildings 225,000
Land 75,000
Equipment 150,000
Fair Allocated Amount

Adjustment
Value Cost
Recorded*
Dr(Cr)
Land P 600,000 P 525,000 P 600,000

P (75,000)
Buildings 1,400,000 1,225,000

1,000,000 225,000
Equipment 1,200,000 1,050,000

1,200,000 (150,000)
Totals P 3,200,000 P2,800,000

P2,800,000 P _______--
The total acquisition price of assets acquired at a lamp sum

price a “basket price” should be allocated to the assets on the
basis of their relative fair value.
*Land(P600,000/P3,200,000 x P2,800,000) P
525,000
Buildings(P1,400,000/P3,200,000 x P2,800,000)
1,225,000
Equipment(P1,200,000/P3,200,000 x P2,800,000)
1,050,000
2. Interest Payable 30,000

Factory Equipment 30,000
The interest on the note payable issued should be recognized as

interest expense over the term of the note.
3. Purchase discount 16,000

Store equipment 30,000
An item of PPE acquired on credit for an account should be

recognized net of any cash discount, irrespective of whether the
discount taken or not.
4. Profit on construction 2,000,000

Buildings 2,000,000
The cost of a self-constructed asset is determined by applying

the same principles as for an acquired asset. Any internal
profit is eliminated to arrive at the cost of the asset.
The “profit” recognized by the company is actually a saving on

construction that can be realized through lower depreciation
charges on the asset.
PROBLEM 5-2
Acquisition of Equipment on a Deferred Payment Basis
SAXOPHONE COMPANY acquires a new manufacturing equipment on

January 1, 2009, on installment basis. The deferred payment
contract provides for a down payment of P300,000 and an 8-year
note for P3,104,160. The note is to be paid In 8 equal annual
installment payments of P388,020, including 10% interest. The
payments are to be made on December 31 of each year, beginning
December 31,2009. The equipment has a cash price equivalent of
P2,370,000. Saxophone’s financial year-end is December 31.
1. What is the acquisition cost of the equipment

A. P3,404,160 C. 2,370,000
B. P2,804,160 D.P3,104,160
2. The amount to be recognized on January 1, 2009, as discount
on note payable is
A. P1,034,160 C. P827,160
B. P310,416 D. P 0
3. The amount of interest expense to be recognized In 2009 is
A. P 0 C. P310,416
B. P188,898 D. P207,000
4. The amount of interest expense to be recognized in 2010 is
A. P310,416 C. P207,000
B. P188,898 D. P 0
5. The carrying value of the note payable at December 31, 2010,
is
A. P1,689,858 C.P1,312,062
B. P1,888,980 D. P1,700,082
SOLUTION 5-2
1. Acquisition cost of equipment

(cash price equivalent)
P2,3700,000
Answer: C
PAS I6 (Property, Plant and Equipment) States that the cost of

an item of PPE is its cash price equivalent. If payment is
deferred beyond normal credit terms, the difference between the
cash price equivalent and the total payment is recognized as
interest expense over the credit term unless such interest is
capitalized in accordance with PAS 23.
2. Cost of equipment (cash price equivzlent)
P2,370,000
Less: Down payment
300,000
Amount assigned to note payable
2,070,000
Face value of note
3,104,160
Discount on note payable, Jan. 1, 2009
P1,034,160
Answer: A
The entry to record the acquisition is:
Equipment 2,370,000
Discount on note payable 1,034,160
Note payable 3,104,106
Cash 300,000
3. Interest expense for 2009:

Carrying value for note payable, Jan.1,2009
(P3,104,160-P1,034,160)
P2,070,000
Interest rate
x 10 %
Discount amortization for 2009
P 207,000
Answer: D
The entry to record the discount amortization is:
Interest expense 207,000
Discount on note payable 207,000
4. Interest expense for 2010:

Note payable, Jan.1,2009
P3,104,160
Less: Payment made on Dec. 31, 2009
388,020
Note payable, Dec.31,2009
2,716,140
Discount on note payable. Dec. 31, 2009
(P1,034,160-P207,000)
(827,160)
Carrying value of note, Dec. 31, 2009
1,888,980
Interest rate
x 10%
Discount amortization(interest expense for 2010)
P 188,989
Answer: B
5. Carrying value of note, on Dec. 31, 2009(see no.4)

P 1,888,980
Discount amortization for 2010(see no.4)
188,898
Payment made on Dec. 31, 2010
(388,020)
Carrying value of note, Dec. 31, 2010
P 1,689,850
Answer: A
PROBLEM 5-3
Land and building Acquisition for Stock ad Cash.
OBOE CORP., acquired land and an old building in exchange for

P3,000,000 cash ad 500,000 ordinary shares with a par value
of P15 per share. The company’s stock was selling P40 per
share when the acquisition was made. Oboe incurred the
following costs in connection with the acquisition
Legal fees to complete the transaction P150,000

Property tax for previous year 850,000
Cost to demolish the old building 325,000
Salvage value of demolished building (194,000)
1. What is the total cost of the building purchased by Oboe

Corp.?
A. P 0 C. P23,131,000
B. P23,000,000 D. P11,631,000
2. What is the total cost of the land acquired by Oboe Corp.?
A. P11,631,000 C. P1,000,000
B. P24,131,000 D. P23,869,000
SOLUTION 5-3
1. In acquiring the property, Oboe Corp., did not intend to use

the old building. Therefore, no amount should be assigned to
the building acquired. The total acquisition price and the
directly attributable costs incurred by the company to
prepare the property for its intended use should be charged
to the land amount.
Answer: A
2. Market value of ordinary shares

(P40 x 500,000 shares)
Cash paid P20,000,000
Legal cost 3,000,000
Proper tax – previous year 150,000
Cost of building demolition, net of salvage proceeds
(P325,000-P194,000)
Total cost of land 131,000
P24,131,000
Answer: B
If equity securities (e.g., ordinary should be exchange for

goods or services, the transaction is measured at the fair value
of the goods or services received. This is on the presumption
that the fair value cannot be estimated reliably, the
transaction is measured by reference to the fair value of the
equity securities issued.
PROBLEM 5-4
Purchased and Self-constructed Equipment
Various equipment used by BASSOON CO. in its operation are

either purchased from dealers or self-constructed. The following
items of two different types of equipment were recorded during
the calendar year 2010.
Manufacturing equipment(self-constructed):
Materials and purchased parts at gross invoice price
(Bassoon failed to take the 2% cash discount) P450,000
Imputed interest on funds used during construction
(stock financing) 36,000
Labor costs 185,000
Overhead costs(fixed-P40,000; variable- P60,000) 100,000
Gain on self-construction 74,000
Installation cost 8,600
Store equipment (purchased):
Cash paid for equipment P 175,000
Freight and insurance cost while in transit 3,500
Cost of moving equipment into place at store 1,200
Wage cost for technicians to test equipment 7,000
Insurance premium paid during first year of operation
On this equipment 5,200
Special plumbing fixtures required for this equipment 8,200
Repair cost incurred in first year of operations related
To this equipment 1,450
1. What is the total cost of the self-constructed equipment?

A. P674,600 C. P734,600
B. P770,600 D. P743,600
2. What is the total cost of the store equipment purchased?
A. P200,000 C. P191,400
B. P193,700 D. P194,900
SOLUTION 5-4
1. Manufacturing equipment(self-constructed):
Materials and parts (P450,000 x 98%) P441,000
Labor costs 185,000
Overhead costs 100,000
Total cost P 734,600
Answer: C
The cost of purchased materials and parts is net of the 20% cash
discount because the equipment should be recorded at its task
price equivalent.
The imputed interest on stock financing should not be

recognized, neither capitalized nor expended
The gain on self-construction should not be reported. Cash

should only be recognized when the asset is sold.
2. Store equipment (purchased):
Cash paid for equipment P 175,000
Freight and insurance cost while in transit 3,500
Cost of moving equipment into place at store 1,200
Wage cost for technicians to test equipment 7,000
Special plumbing fixtures required for this
equipment 8,200
Answer: D
The cost of an item of PPE comprises:
a.) Its purchase price, including import duties and non-

refundable purchase taxes deducting any trade discounts
and rebates
b.) Any directly attributable costs to bring the asset to the
location and working condition necessary for it to
capable of operating in the manner intended by management
c.) The initial estimate of the costs of dismantling and
removing the item and restoring the site on which it is
located, the obligation for which an entity incurs either
when the item is acquired or as a consequence of having
used the item during a particular period for purposes
other than to produce inventories during that period.
Examples of directly attributable cost are:
1. cost of employee benefits arising directly from

construction or acquisition of the PPE item
2. the cost of site preparation
3. initial delivery and handling costs
4. installation and assembly costs
5. professional fees
6. costs of testing whether the asset is functioning proper,
after deducting the net proceeds from selling any items
produced is bringing the assets to that location and
condition (such as scamples produced when testing
equipment)
(PAS I6, pars, I6 and I7)
The recognition of costs in the carrying amount of an item of

PPE should cease when the item is in the location and
condition necessary for it to be capable of operating in the
manner intended by management. Thus, the repair cost incurred
and the insurance premium paid in the first year of operation
of the equipment should be expensed, and not be capitalized.
PROBLEM 5-5
Noninterest-bearing Note Issued to purchase equipment
CELLO CORP. had been experiencing a significant increase in

customers demand for its product. To expand its production
capacity, Cello decided to purchase equipment from Pede Utang
Company on January 2, 2009. Cello issues a P2,400,000 5-year,
noninterest-bearing note to Pede Utang for the new equipment
when the prevailing market rate of interest for obligations of
this nature is 12%. The company will pay off the note in five
P480,000 installments due at the end of each year over the
life of the note. Cello’s financial year-end is December 31.
The appropriate present value factor of an ordinary annuity of
I at 12% for 5 period is 3.60478
1. What is the cost of the new equipment?

A. P2,112,000 C. P1,730,294
B. P1,457,931 D. P2,400,000
2. What amount of interest expense should be reported on
Cello’s income statement for the year ended December 31,
2010?
A. P174,951 C.P230,400
B. P207,635 D. P268,000
3. What is the carrying value of the note at December 31, 2011?
A. P1,440,000 C. P1,480,932
B. P811,226 D. P1,152,880
SOLUTION 5-5
1. Cost of new equipment (P480,000 x 3.69478) P1,730,294

Answer: C
The entry to recorded the purchase :
Equipment 1,730,294
Discount on note payable

(P2,400,000-P1,730,294) 669,706
Note payable 2,400,000
2. Interest expense for 2010

(see amortization schedule) P174,951
Answer: A
The entries to record the payment and interest for 2010 are:
Discount on note payable 174,951
Note payable 480,000
Cash 480,000
3. Carrying value of note payable at Dec.31,2011

Answer: B
AMORTIZATION SCHEDULE:
REDUCTION CARRYING
DATE PAYMENT INTEREST OF PRINCIPAL VALUE
Jan.2, 2009 P1,730,294
Dec.31,2009 P480,000 P207,635 P272,365 1,457,929
Dec.31,2010 480,000 174,951 305,049 1,152,880
Dec.31,2011 480,000 138,346 341,654 811,226
Dec.31,2012 480,000 97,347 382,653 428,573
Dec.31,2013 480,000 51,427* 428,573 ---------
*P428,573 x 12% = P51,429
Discrepancy of P2(P51.429-P51,427) due to rounding

PROBLEM 5-6
Journal Entries for PPE Acquisitions
Described below are transactions related to GUITAR COMPANY.
a.) The national government gives the company a large tract

of land. The condition attached to this government grant
is that Guitar is to construct a plant facility on the
site to provide employment opportunities to its
residents. The fair value of the land is determined to be
P4 million.
b.) 150,000 ordinary shares with a par value of P20 per share
are issued in exchange for land and building. The fair
values of the land and building acquired are P5,400,000
ad P18,900,000, respectively. The company’s stock is
currently selling at P175 per share.
c.) Still included in the materials, direct labor, and
overhead accounts are amounts that are properly
chargeable to the machinery account. These represent
costs of a machinery constructed by Guitar during the
current year. These represents costs of a machinery
constructed by Guitar during the current year. These
costs are:
Materials used P375,000

Factory supplies used 27,000
Direct labor incurred 450,000
Incremental overhead(Over regular) arising from
Construction of machinery(excluding factory supplies
used) 81,000
Fixed overhead rate applied to regular
Manufacturing operations 60% of direct labor cost
Cost of similar machinery if it had been
Purchased from an outside dealer 1,320,000
Prepare journal entries to record these transactions.
SOLUTIONS 5-6
a.) Land 4,000,000

Deferred income-government grant 4,000,000
The fair value of the land received from the national

government is to be recognized as income over the useful life of
the plant facility to be expected on the site.
For a non-monetary grant such as land or other resources, it is

usual to assess the fair value of the non-monetary asset and to
use that fair value to account for both grant and asset.
Grants related to non-depreciable assets that require fulfillers

of certain obligations are recognized as income over the periods
which bear the costs of meeting the obligations.
(PAS 20: Accounting for Government Grants and Disclosure of

Government Assistance)
b.) Land 5,400,000

Building 1 8,900,000
Ordinary shares(P20 x 150,000 shares) 3,000,000
Share premium 21,300,000
The transaction should be measured and recognized at the fair

value of the property received. The fair value of the stock is
to be used only if the fair value of the property received
cannot be reliably determined.
c.) Machinery 1,203,000

Materials 375,000
Direct labor 450,000
Factory overhead 378,000*
*Fixed overhead applied(P450,000 x 60%) P270,000
Incremental overhead 81,000
Factory supplies used 27,000

Total P378,000
PROBLEM 5-7
Acquisition of PPE Items
The following information relates to PIANO COMPANY.
a.) On July 1, Piano purchased the plant assets of Yokona

CO., which had discontinued operations. The following are
the fair values of the plant assets acquired:
Land P10,500,000
Building 31,500,000
Machinery and equipment 21,000,000
Total P63,000,000
Piano issued 550,000 shared of its P100 per value ordinary

shared 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 Jul

1 and December 20, the date when the company first
occupied the building:
Special assessment by city on land P 540,000

Repairs to building 3,150,000
Construction of bases for machinery
And equipment acquired 4,050,000
Driveways and parking lots 3,660,000
Remodelling of office space in
Building, 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.
Based on the preceding information, calculate the cost of
each of the following PPE items:
1. Land
A. P10,540,000 C.P14,200,000
B. P14,700,000 D. P11,040,000
2. Buildings
A. P39,480,000 C. P31,500,000
B. P37,980,000 D. P30,000,000
3. Machinery and equipment
A. P32,009,000 C. P33,009,000
B. P28,959,000 D. P21,000,000
4. Land improvement
A. P4,200,000 C. P540,000
B. P3,660,000 D. P0
5. The entry to record the purchase of Yokona’s plant
assets should include a
A. Debit to Land of P22,666,667
B. Credit to Share Premium of P8,000,000
C. Credit to Ordinary Shares of P63,000,000
D. Debit to Machinery and Equipment of P29,333,333
SOLUTION 5-7
1. Land P11,040,000
Answer: D
2. Buildings P39,480,000
Answer: A
3. Machinery and equipment P33,009,000

Answer: C
4. Land improvements P 3,660,000
Answer: B
5. Total fair value of plant assets acquired
Less: Par value of ordinary shares P63,000,000
(P100x550,000)
Share premium
55,000,000
P 8,000,000
The entry to record the acquisition on July 1 is:
Land 10,500,000
Building 31,500,000
Ordinary shares 55,000,000
Share premium 8,000,000
Answer: B
PROBLEM 5-18
Capitalization of Interest
MARACAS COMPANY constructs its own building. In 2009, a total of

P1,228,500 interest was included as part of the cost of a new
building just being completed.
The following is a summary of construction expenditures in 2010:
Acuumulated in 2009, including
capitalized interest P18,228,500
March 1 7,000,000
September 1 4,000,000
December 31 5,000,000
Total P34,228,500
Maracas has the following outstanding loans December 31, 2010:
12 note related directly to new building;
Term, 5 years from beginning of construction P10,000,000

General borrowings:
10% note issued prior to construction
Of new building; term 10 years 5,000,000
8% note issued prior to construction
Of new building; term 5 years 10,000,000
1. The capitalization rate is

A. 8.67% C. 12%
B. 10% D.8%
2. The average accumulated expenditures in 2010 is
A. P25,811,834 C. P34,228,500
B. P24,166,667 D, P25,395,167
3. The amount of avoidable interest for 2010 is
A. P3,656,500 C. P2,739,517
B. P2,500,000 D. P2,534,761
4. The amount of capitalizable interest in 2010 is
A. P2,500,000 C.P2,739,517
B. P2,534,761 D. P1,200,000
5. The total cost of the new building is
A. P35,500,000 C. P36,763,261
B. P36,728,500 D. P27,895,167
SOLUTION 5-18
1. . Principal Interest Cost

10% note P 5,000,000 P 500,000
8% note 10,000,000 800,000
15,000,000 P 1,300,000
Capitalization rate (P1,300,000/P15,000,000) 8.67%
Answer: A
2. . Months
Date Expenditures Outstanding Amount
Accumulated
in 2009 P18,228,500 12 P218,742,000
March 1 7,000,000 10 70,000,000
September 1 4,000,000 4 16,000,000
December 31 5,000,000 0 0
Total p34,228,500 P304,742,000
Average expenditures (P304,742,000/12) P25,395,167
Answer: D
3. Note related directly to new building-

Specific-borrowing(P10,000,000 x 12%) P1,200,000
General borrowings:
Average expenditures P25,395,167
Less: Amount related to
Specific borrowing 10,000,000
Amount related to general
Borrowings 15,395,167
Capitalization rate x 8.67% 1,334,761
Total P2,534,761
Answer: D
4. COMPUTATION OF ACTUAL INTEREST FOR 2010:

12% note(P10,000,000 x 12%) P1,200,000
10% note(P 5,000,000 x 10%) 500,000
8% note(P10,000,000 x 18%) 800,000
Total P2,500,000
The amount that should be capitalized in 2010 should be the

actual borrowing cost of P2,500,000. Again, under PAS 23,
the amount of borrowing costs capitalized should not exceed the
actual borrowing costs incurred during the perios.
Answer: A
5. Construction costs, including interest

Capitalized prior to 2010(see no.2) P34,228,500
Capitalizable interest in 2010(See no.4) 2,500,000
Total cost of building P36,728,500
Answer: B
PROBLEM 5-19
Capitalization of INterest
On January 1, 2010, VIOLA CORPORATION contracted with Mega

Construction Company to construct a building for P40, 000, 000 on
land that Viola purchased several years ago. The contract
provides that Viola is to make five payments in 2010, with the
last payment scheduled for the date of completion. The building
was completed on December 31, 2010.
Viola made tine following payments during 2010 :
January 1 P 4, 000, 000
March 31 8, 000, 000
June 30 12, 200, 000
September 30 8, 800, 000
December 31 7, 000, 000
Total P40, 000, 000
Viola had the following debt outstanding at December 31, 2010 :
a.) A 12%, 4-year note dated January 1, 2010, with interest

compounded quarterly. Both principal and interest are
payable on December 31, 2013. This loan relates
specifically to the building project.
P17, 000, 000
b.) A logo, 10-year note dated December 31, 2006, with simple
interest ; interest payable annually on December 31
12, 000, 000

c.) A 12%, 5-year note dated December 31, 2008, with simple
interest ; interest payable annually on . December 31
14, 000, 000
The following present and future value factors are taken from the
present and future value tables :
3% 12%
Future value of 1 for :
4 periods 1. 12551 1. 57352
16 periods 1. 60471 6. 13039
Present value of 1 for ;
4 periods 0. 88849 0. 63552
16 periods 0. 623 17 0. 16312
1. In the computation of the avoidable interest for 2010, the

appropriate capitalization rate is
A. 11% C. 12%
B. 11. 33% D. 11. 08%
2. What is the average accumulated expenditures in 2010?
A. P3,333,333 C. P20,000,000
B. P18,300,000 D. P40, 000, 000
3. What is the total avoidable interest cost in 2010?
A. P2,271,710 C. P2,280,960
B. P2,184,040 D. P2,466,070
4. What is the amount of interest that should be capitalized in

2010?
A. P2,184,040 C. P5,013,670
B. P2,466,070 D. P2, 277, 710

5. Viola's income statement for 2010 should include interest
expense of
A. P5,013,680 C. P2,277,710
B. P2,735,960 D. P 0
SOLUTION 5-19
1. Principal Interest Cost
10% note P 12,000,000 P 1,200,000
12% note 14,000,000 1,680,000
Total P 26,000,000 P 2,880,000
Capitalization rate (P2, 880, 000/P26, 000, 000) 11.08%
Answer: D
2. Average
Capitalization Accumulated
Date Expenditure Period Expenditures
Jan.1 P 4,000,000 12/12 P 4,000,000
March 31 8,000,000 9/12 6,000,000
June 30 12,000,000 6/12 6,100,000
Sept. 30 8,000,000 3/12 2,200,000
Dec.31 7,000,000 0/12 0
P40,000,000 P18,300,000
Answer: B
3. Specific borrowing :
Future value of note on Dec. 31, 2010

(P17, 000, 000 × 1. 12551) P19,133,670
Present value of note on Jan. 1, 2010 17,000,000 P2,133,670
General borrowings :
Average expenditures P18,300,000
Less : Amount related to specific
Borrowing 17,000,000
Amount related to general borrowings 1,300,000
Capitalization rate x 11.08% 144,040
Total avoidable interest cost P2,227,710
Answer : A
4. 12% note - compound interest

(P19,133,670-P17,000,000) P2,133,670
10% note-simple interest(P12,000,000x10%) 1,200,000
12% note-simple interest(P14,000,000x12%) 1,680,000
Total actual interest incurred in 2010 P5,013,670
The interest cost to be capitalized is the total avoidable

interest cost of P2,277,710 because it is lower than the actual
interest cost.
Answer:D
5. Actual interest cost P5,013,670
Less : Interest cost to be capitalized 2,277,710
Interest expense for 2010 P2,735,960
Answer : B
PROBLEM 5-20
Subsequent Expenditures
Some parts of XYLOPHONE COMPANY's factory building were replaced

during 2010.
a.) The outside corrugated covering on the factory walls was
removed and replaced. The job was done by a reputable
construction firm and will extend the life of the
building by four years. The cost of the new wall was
P189,000. The cost of the old wall was determined to be
P150,000. The building is 25% depreciated.
b.) Dust filters installed in the interior of the factory
were replaced at a cost of P90, 000. Management believes
that the new filters will duce health hazards and thus
reduce employee benefit costs. The original filters cost
P45,000 and are one-third depreciated.
Prepare journal entries based on the-preceding information.
SOLUTION 5-20
JOURNAL ENTRIES
a) 1. Loss from replacement of wall 112,500

Accumulated depreciation 37,500
Buildings (old wall) 150,000
2. Buildings (new wall) 189,000
Cash 189,000
b) 1. Loss from replacement of filters 30,000

Filters (old) 45,000
2.Filters (new) 90,000
Cash 90,000
PAS I6 provides that an entity should recognize in the carrying

amount of an item of PPE the cost of replacing part of such an
item when that cost is incurred if the recognition criteria are
met. The carrying amount of the replaced part is derecognized.
The gain or loss to be recognized from the derecognition of an
item of PPE is the difference between the net disposal proceeds,
if any, and the carrying amount of the item.
PROBLEM 5-21
CABARA COMPANY, whose accounting year ends on Decernber 31,
provides delivery services for packages to be taken between the
city and the airport.
On January 1, 2009, the company acquired a delivery van from Togo

Trucks. The company paid cash of P1, 020, 000 to Togo, which
included registration fees of P20, 000. Insurance costs for the
First year amounted to P24, 000. The truck is expected to have a
useful life of five years. At the end of its useful life, the
asset is expected to be sold for P480, 000, with costs relating
to the sale amounting to P8, 000.
On January 1, 2010, Cabara's management decided to add another

vehicle, a flat-top, to the fleet. This vehicle was acquired from
a liquidation auction at a cash price of P600, 000. The vehicle
needed some repairs
for the elimination of rust (cost P46, 000) and the replacement
of all tires (cost P12, 400). The company believed it would use
the flat-top for another two years and then sell it. Expected
selling price was P300. 000 with selling costs estimated to be
P8, 000.
On January 1, 2010, a radio communication system was installed in

both vehicles at a cost per vehicle of P6, 000. This was not
expected to have any material effect on the future selling price
of either vehicle.
Insurance costs for 2010 were P24, 000 for the first vehicle and
P18, 000 for the newly acquired vehicle. On January 1, 2011, the
flat-top that had been acquired, red at auction broke down. The
company thought about acquiring a new vehicle to replace this one
but, after considering the costs, decided to repair the flat-top
instead. The vehicle was given a major overhaul at a cost of
P130, 000. Although this was a major expense, management believed
that the company would keep the vehicle for another two-years.
The estimated selling price in three years time is P240, 000,
with selling costs estimated at P6, 000. Insurance costs-for 2011
were the same as for the previous year.
1. What is the cost of the delivery van acquired on January 1,

20097
A. P1,044,000 C. P1,020,000
B. P1,052,000 D. P1,000,000
2. What is the cost of the flat-top vehicle purchased on January

1, 2010?
A. P658,400 C. P612,400
B. P600,000 D. P646,000
3. What is the depreciation expense for 2009?
A. P109,600 C. P114,400
B. P105,600 D. P104,000
4. What is the depreciation expense for 2010?
A. P300,600 C. P293,000
B. P291,200 D. P293,300
5.What is the depreciation expense for 2011?
A. P231,833 C. P212,500
B. P293,300 D. P230,333
SOLUTIONS 5-21
1. Cash paid P1,020,000
Less:Vehicle registration fee 20,000
Cost of delivery van P1,000,000
Answer: D
2. Cash price P 600,000
Repairs for the elimination of rust 46,000
Replacement of all tires 12,400
Cost or flat-top vehicle P 658,400

Answer : A
3. Cost of delivery van(see no.1) P 1,000,000
Less:Residual value(P480,000-P8,000) 472,000
Depreciable cost 528,000
Divide by estimated useful life + 5 years
Depreciation for 2009 P 105,600
Answer : B
4. Delivery van:
Remaining depreciable cost, Jan. 1,2010
(P528,000-P105,600) P 422,400
Add : Cost of communication system 6,000
Total 428,400
Divide by remaining useful life(5-1) / 4 years
P 107,100
Flat-top vehicle :
Cost (see no. 2) P658, 400

Add : Cost of communication system 6, 000
Total cost 664, 400

Less:Residual value(P300,000-P8,000) 292, 000
Depreciable cost 372, 400
Divide by estimated useful life / 2 years
Total depreciation for 2010 P 293,300
Answer : D
Delivery van (same as previous year) P 107,100

Flat-top vehicle :
Book value, Jan, 1 (P664, 400-P186, 200) P478, 200

Major overhaul 130,000
Total 608, 200
Less: Residual value(P240,000·P6,000) 234, 000
Remaining depreciable cost 374, 200
Divide by revised remaining life / 3 years
Total depreciation for 2011 P 231,833
Answer : A
PROBLEM 5-22
Depreciation
SHENG COMPANY constructed a building for use by the

administration section of the company. The completion date was
January 1, 2003, and the construction cost was P16, 800, 000. The
company expected to remain in the building for the next 20 years,
at which time the building would probably have no real salvage
value and have to be demolished. It is expected that demolition
costs will amount to P300, 000.
In June 2009, following a storm that wreaked vast destruction in

the city, the roof of the administration building was considered
to be in poor shape so the company decided to replace it. On
January 1, 2010, a new roof was installed at a cost of P4, 400,
000. The new roof was of a different material to the old roof,
which was estimated to have cost only P2, 800, 000 in the
original construction, although at the time of construction it
was thought that the roof would last for the 20 years that the
company expected to use the building. Because the company had
spent the money replacing the roof, it thought that it would
delay construction of a new building, thereby extending the
original life of the building from 20 years to 25 years.
1. If the roof were treated as a separate component of the

building, the total depreciation expense for 2010 would be
A. P750,000 C. P606,667
B. P681,566 D. P672,000
2. If the roof were not treated as a separate component of the

building, the total depreciation expense for 2010 would be
A. P1,178,462 C. P851,111
B. P861,944 D. P750,000
SOLUTION 5-22
1. Roof (P4,400,000/18 years) P244,444

Rest of the building :
Cost (P16,800,000-P2,800,000) P14,000,000
Less : Accumulated depreciation
(p14, 000, 000 × 7/20) 4,900,000
Book value, Jan. 1, 2010 9,100,000
Divide by revised remaining life (25-7) /18yrs 505,556
Total P750,000
Answer: A
2. Book value of building, Jan 1, 2010

(P16,800,000×13/20) P10,920,000
Add : Cost of new roof 4,400,000
Total 15,320,000
Divide by revised remaining life (25-7) / 18yrs
Depreciation expense for 2010 P 851,111
Answer: C
PROBLEM 5-23
Depreciation-Components Approach
On January 1, 2010, CHRODOHONE AIRLINES acquired a new airplane

for a total cost of P200 million. A breakdown of the costs to
build the airplane was given by the manufacturers :
Aircraft body P60,000,000
Engines (2) 80,000,000
Fittings :
Seats 20,000,000
Carpets 1,000,000
Electrical equipment
-passenger seats 4,000,000
-cockpit 30,000,000
Equipment-food preparation 5,000,000
All costs include installation and labor costs associated with

the relevant part. It is expected that the aircraft will be kept
for 10 years and then sold. The main value of the aircraft at
that stage is the body and the engines. The expected selling
price is P42 million, with the body and engines retaining
proportionate value.
Costs in relation to the aircraft over the next ten years are
expected to be as follows :
AIRCRAFT BODY
This requires an inspection every two years for cracks and wear
and tear, at a cost of P200, 000.
ENGINES
Each engine has an expected life of four years before being sold
for scrap. It is expected that the engines will be replaced in
2014 for P90 million and again in 2018 for P120 million. These
engines are expected to incur annual maintenance costs of P6
million. The manufacturer has informed Chordophone Airlines that
a new prototype engine with an extra 10% capacity should be on
the market in 2016 and that existing engines could be upgraded at
a cost of P20 million.
FITTINGS
Seats are replaced every three years. Expected replacement costs

are P24 million in 2013 and P30 million in 2019. The repair of
torn seats and faulty mechanisms is expected to cost P2million
per annum. · Carpets are replaced every five years. They will be
replaced in 2015 at an expected cost P1. 3 million, but will not
be replaced before the aircraft is sold in 2020. Cleaning costs
per annum amount to P200, 000. The electrical equipment (such as
the TV) for each seat has an annual repair cost of P300, 000. It
is expected that, with the improvements in technology, the
equipment will be totally replaced in 2016 by Substantially
better equipment at a cost of P7 million. The electrical
equipment in the cockpit is tested frequently at an expected
annual cost of P5 million. · Major upgrades to the equipment are
expected every two years at expected costs of P5 million On
2012), P5 million On 2014), P6. 9 million On 2016) and P8, 2
million (in 2018). The upgrades will take into effect the
expected changes in technology.
EQUIPMENT-FOOD PREPARATION
This incurs annual costs for repair and maintenance of P400, 000.
The equipment is expected to be totally replaced in 2016.
1. The total aircraft body-related expenses for 2010 would be
A. P4,400,000 C. P2,950,000
B. P4,300,000 D. P6,100,000
2. The total engine-related expenses for 2010 would be
A. P21,500,000 C. P26,000,000
B. P16,111,111 D. P20,000,000
3. The total expenses related to aircraft fittings for 2010

would be
A. P18, 033, 334 C. P15, 366, 667
B. P30, 033, 334 D. P10, 533, 334
4. The total expenses related to the food preparation equipment

for 2010 would be
A. P1, 233, 333 C. P833, 333
B. P1, 400, 000 D. P400, 000
5. The total annual depreciation approach is
A. P15, 800, 00 C P20,000,000
B. P34,566,667 D. P35,566,667
SOLUTION 5-23
1. AIRCRAFT BODY
Annual inspection for cracks and wear and tear
(P200, 000 × l/2) P100,000
Depreciation expense :
Cost of aircraft body P60, 000, 000

Less : Residual value
(P42 million x 6/14) 18, 000, 000

Depreciable cost 42, 000, 000
Divide by useful life / 10 years 4,200,000
Total expenses P4,300,000
Answer: B
2. ENGINES
Annual maintenance cost P6,000,000
Depreciation expense(P80million/4years) 20,000,000
Total expenses P26,000,000
Answer : C
3. FITTINGS
Seats
Repair costs P2,000,000
Depreciation (P20million/3yrs) 6,666,667 P8,666,667
Carpets
Cleaning costs P200,000
Depreciation (1 million/5 yrs) 200,000 400,000
Electrical equipment-passenger seats

Repair costs P300,000
Depreciation(P4million/6yrs) 666,667 966,667
Electrical equipment-cockpit
Annual testing costs P5,000,000
Depreciation (P30 million/10yrs) 3,000,000 8,000,000
Total P18,033,334
Answer : A
4. EQUIPMENT-FOOD PREPARATION
Repair and maintenance costs P 400,000
Depreciation (P5 million/6 yrs) 833,333
Total P1,233,333
Answer : A
5.ANNUAL DEPRECIATION-COMPONENTS APPROACH
Aircraft body P4,200,000
Engines 20,000,000
Fittings :
Seats P6,666,667
Carpets 200,000
Electrical equipment :
Passenger seats 666,667
Cockpit 3,000,000 10,533,334
Equipment-food preparation 833,333
Total P35,566,667
Answer: D
PROBLEM 5-24
Determining the Costs of PPE Items
MANDOLIN CORP. uses different kinds of machines in its

manufacturing process. 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
2010,
Machine A (purchased)
Cash paid for equipment P250,000
Cost of transporting machine-insurance and transport 9,000
Labor cost of installation by expert fitter 15,000
Labor cost of testing equipment insurance·cost for 2010 12,000
Cost of training for personnel who will use the machine 4,000
Cost of safety rails and platforms surrounding machine 7,500
Cost or water devices to keep machine cool 18,000
Cost of adjustments to machine during 2010 to make it 24,000
operate more efficiently 22,500
Machine B (self-constructed)
Cost of materials to construct machine P210,000
Labor cost to construct machine 129,000
Allocated overhead cost-electricity, factory space, etc. 66,000
Allocated interest cost of financing machine 30,000
Cost of installation 36,000
Profit saved by self-construction 45,000

Safety inspection cost prior to use 12,000
1. What is the cost of machine A?

A. P380, 500 C. P328,000
B. P358, 000 D. P350,500
2. What is the cost of machine B?
A. P471, 000 C. P483,000
B. P417, 000 D. P438,000
3. Which of the following combinations of procedures is an

auditor most likely to perform to obtain evidence about PPE
additions?
A. Inspecting documents and physically examining assets.
B. Recomputing calculations and obtaining written management

representations.
C. Observing operating activities and comparing balances to

prior period balances.
D. Confirming ownership and corroborating transactions

through inquiries of client personnel.
SOLUTION 5-24
1.Machine A
Cash paid for equipment P250,000
Transportation cost 9,000
Testing cost 12,000
Cost of safety rails and platforms 18,000
Cost of water devices to keep machine cool 24,000
Cost of adjustments 22,500
Total cost P350,500
Answer : D
2. Machine B
Cost or materials P210,000
Labor cost 129,000
Overhead cost 66,000
Interest cost 30,000
Safety inspection cost 12,000
Total cost P483,000
Answer: D
3. Inspecting documents and physically examining assets.
Answer : A
PROBLEM 5-25
Classification of PPE Acquisition · Costs
SJTAR COMPANY commenced operations on January 1, 2009. 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 September 2010, the plant was
ready to commenece operation. A gala opening was held on
September 18, with the City-Mayor opening the factory. The first
items were ready for sale on September 25.
During this period, the following cash inflows and outflows

occurred :
 While searching for a suitable block of land, Sitar
placed an option to buy with three real estate
agents at a cost of P1, 000 each.
Payment of option fees P 3,000
 Receipt of loan from bank 3,000,000

 Payment to settlement agent for title search, stamp
duties, and settlement fees 100,000
 Payment of delinquent property taxes assumed by
Sitar Company 50,000
 Payment for land 1,000,000

 Payment for demolition of old building 120, 000
 Proceeds from sale of material from old building 55,000
 Payment to architect 230,000
 Päyment to City Hall for approval of
building construction 120,000
 Payment for safety fence around construction site 34,000
 Payment to construction contractor for
factory building 2,400,000
 Payment or external driveways, parking bays and
safety lighting 540, 000
 Payment of interest on construction loan 400, 000

 Payment for safety inspection on building 30, 000
 Payment for equipment 640, 000
 Payment of freight and insurance costs on delivery of
Equipment 55, 000
 Payment of installation cost on equipment 120, 000

 Payment for safety equipment surrounding equipment 110,000
 Payment for removal of safety fence 20, 000
 Payment for new fence surrounding the factory 80, 000
 Payment for advertisements in the newspaper about
the forthcoming factory and its benefits
to the community 5, 000
 Payment for opening ceremony 60, 000

 Payments to adjust equipment to more efficient operating
levels subsequent to initial operation 33, 000
1. What is the cost of the land?
A. P1, 218, 000 C.P1,166,000
B. P1, 2 16, 000 D.P1,271,000
2. What is the cost of tine building?
A. P3, 279, 000 C.P3,200,000
B. P3, 284, OQ0 D.P3,234,000
3. What is the cost of the land improvements?
A. P620, 000 C. P114, 000
B. P654, 000 D. P 1 34, 000
4. What is the cost of the equipment7
A. P959, 000 C. P903, 000
B. P849, 000 D. P1, 359, 000
5. The amount to be reported as expensee (excluding

depreciation) Sitars income statement is
A. F60, 000 C. P65, 000
B. P100, 009 D. P67, 000
SOLUTION 5-25
1. Land
Payment option fee on land acquired P 1, 000
Payment to settlement agent 100, 000
Payment of delinquent property taxes 50, 000
Payment for land 1, 000, 000
Payment for demolition of old building 120, 000
Proceeds from sale of material (55,000)
Total cost P1,216,000

Answer: B
2. Building
Payment to architect P 230, 000
Payment for approval of building construction 120, 000
Payment for safety fence 34, 000
Payment to construction contractor 2, 400, 000
Payment of interest on construction loan 400, 000
Payment for safety inspection on building 30, 000
Payment for removal of safety fence 20, 000
Total cost P 3,234,000
Answer: D
3. Land improvements
Payment for external driveways, parking bays,
and safety lighting P 540,000
Payment for new fence 20,000
Answer:A
4. Equipment
Acquisition price P 640, 000
Freight and insurance 56, 000
Installation cost 120, 000
Safety equipment 110, 000
Adjustment to equipment 33, 000

Total cost · P959,000
Answer : A
5.Option fees on land not acquired P 2,000
Advertising 5,000
Opening ceremony 60,000
Total amount to be reported as expenses P67,000
Answer: D
PROBLEM 5-26
FIDDLE COMPANY uses a large number of machines designed to

produce garments. These machines are generally depreciated at
logo per annum on a straight-line basis. In general, machines are
estimated to have a residual value on disposal of logo of cost.
At January 1, 2010, Fiddle had a total of 73 machines, and its
statement of financial position showed a total cost of P1, 260,
000 and accumulated depreciation of P390, 000.
During 2010, the following transactions occurred :
 On March 1, 2010, a new machine was acquired for P45, 000.

This machine replaced two other machines. One of the two re-
placed machines was acquired on January 1, 2007 for P24,
600. It was traded in on the new machine with Fiddler.
Making a cash payment of P26, 400 on the new machine. The
second replaced machine had cost P27, 000 on October 1, 2007
and was sold for P21, 900 ;
 On July 1, 2010, a machine that had cost P12, 000 on January
1, 2001 was retired from use and sold for scrap for P1, 500.
 On July 1, 2010, (3 machines that had been acquired on July
1, 2007 for P21, 000 was repaired because its motor had been
damaged from overheating. The motor was replaced at a cost
of P14, 400. It wAs expected that this would extend the life
of the machine by an extra two years.
 On October 1,'2010, Fiddiè fitted new form of arm to. a
machine used for putting special designs onto garments. The
arm cost P3, 500. The machine had been acquired on October
1, 20010Fiddle fitted a new form of arm to a machine used
for putting designs onto garments. The arm cost P3,6000. The
machine had been acquired on a number of other machines when
reguired and has a 15-year life. It will not be sold when
any particular machine is retired, but retained for use on
other machines.
1.What amount of gain (loss) should be recognized on the sale of

the second replaced machine on March 1, 2010?
A. P772 C.P(772)
B.P1,425 D.P(1,425)
2. What amount of gain (loss) should be sold for scrap on July 1,

2010?
A. P (900) C. P900
B. P2 410 D. P (240)
3. What amount of depreciation should be provided in 2010 on the

machine whose motor was replaced on July II, 2010?
A. P1, 890 C. P2, 972
B. P2, 431 D. P7, 634
4. What amount of depreciation should be provided in 2010 on the

machine arm installed on October 1, 2010?
A. P129 C. P60
B. P54 D. P 0
5. In testing for unrecorded retirements of equipment, an auditor

is most likely to
A. Select items of equipment from the accounting records and then

locate them during the plant tour
B. Compare depreciation journal entries with similar prior-year

entries in search of fully depreciated equipment
C. Inspect items of equipment observed during the plant tour and

then trace them to the equipment observed during the plant tour
and then trace them to the equipment subsidiary ledger
SOLUTION 5-25 1
1. Proceeds From sale

Carrying value : P21,900
Cost P27,000
Accumulated depreciation,
Oct. 1, 2007 – Mar. 1, 2010
(P27, 000 × 901% x 10% x 2 5/12) (5,872) 21,128
Gain on sale P 772
Answer : A
2. Proceeds from sale

Carrying value : P1,500
Cost P12,000
Accumulated depreciation,
July 1, 2002 - July 1, 2010
(P12,000 x 90% x 10% x 9 6/12) 10,260 1,740
Loss on sale P (240)
Answer: D
3. Depreciation on machine overhauled :

Jan. 1-July 1 (P21, 000 × 90% x 10% X ½) P945
July 1-Dec. 31 (P29, 730*. 90% = P26, 757 x 1/9 x ½) 1,486
Total P2,431
*Cost P21,000
Accumulated depreciation, July 1, 2008-
July 1, 2010 (P21, 000× 90% x 10% x 3) 5,670
Bookvalue, July 1, 2010 15,330
Add : New motor 14,400
Total P29,730
Answer: B
4. Depreciation on arm :
(P3, 600x 1/15 x 2/12)
Answer: C
5. Select items of equipment from the accounting records and
then locate them during the plant tour.
Answer : A
PROBLEM 5-27
Separate Depreciation for Each Significant Part of an Item of

PPE
HARP COMPANY, whose financial year-end is December 31, purchased

a new manufacturing equipment on April 1, 2003. The equipment has
a special component that requires replacement before the end of
the equipment's useful life. This equipment was initially
recognized in two accounts: one is for the main unit and the
other for the special component. Harp uses the straight-line
method of depreciation for all of its manufacturing equipment.
Depreciation is recorded to the nearest month, residual values
being disregarded.
On April 1, 2009, the special component is removed from the main

unit and is replaced with a similar component. This component is
expected to have a residual value of approximately 25% of cost at
the end or the main unit's useful life. Because of its
materiality, the residual value will be considered in calculating
depreciation, Specific information about Elli equipment is as
follows :
Main unit
Purchase price in 2003 P 187,200
Residual value 13,200
Estimated useful life 10 years
Component 1
Purchase price P 30,000
Residual value 750

Estimated useful life 6 years
Component 2
Purchase price P45,750
1. What is the depreciation charge to be recognized for the year

2003?
A. P17, 790 C. P16, 706
B. P23, 720 D. P16, 800
2. What is the deprecation charge to be recognized for the year

2009?
A. P30, 154 C. P38, 548
B. P23, 720 D. P26, 404
3. What is the depreciation charge to be recognized for the year

2010?
A. P27, 298 C. P18, 720
B. P30, 158 D. P25, 798
SOLUTION 5-27
1. DEPRECIATION FOR 2003 :
Main unit (P187, 200/10 years X 9/12) P14,040
Component1(p30, 000/6 years x 9/12) 3,750
Total P17,790
Answer : A

Main unit (P187, 200/10 years) P18,720
Component 1 (p30, 000/6 years x 3/12) 1,250
Component 2 (P45, 750 × 75% = P34, 312.

50/4 years X 9/12) 6,434
Total P26,404
Answer : D
Main unit (P187, 200/10 years) P18,720
Component 2 (P34, 312. 50/4 years) 8,578
Total P27,298
Answer: A
PROBLEM 5-28
Calculating Acquisition Cost of Various PPE Items
KITHARA CO RP. commenced operations early in 2010.-During its

first nine months, Kithara acquired real estate for the
construction of a building and other facilities. Operating
equipment was purchased and installed, and the company began
operating activities in April 2010. The company's accountant, who
was not sure how to record. some of the transactions, opened a
Property, Plant, and Equipment (PPE) ledger and count and
recorded debits and (credits) to this account as follows.
1. Cost of real state purchased as a building site P1,700,000

2. Paid architect's fee for design of new building 230,000
3. Paid for the demolition of an old building on the
building site purchased in 1. 280,000
4. Paid property tax on the real estate purchased as a building
site in 1. 17,000
5. Paid excavation cost for the new building. 150,000
6. Made the first payment to the building contractor 2,500,000
7. Paid for equipment to be installed in the new
building. 1,480,000
8. Received from sale of salvage materials from demolishing the
old building. (68,000)
9. Made final payment to the building contractor. 3,500,000
10. Imputed interest on Kithara's own
construction fund. 220,000
11. Paid freight on equipment purchased. 19,000
12. Paid installation costs of equipment. 42,000
13. Paid for repair of equipment damaged during
installation. 27,000
PPE ledger account balance P10,097,000
Based on the preceding information, Determine the amount to be

charged to each of the following :
1. Land
A. P1, 912, 000 C.P2,149,000
B. P1, 929, 000 D.P2,011,000
A. P82, 000 C. P150,000
B. P68, 000 D. P 0
3. Building
A. P6, 380, 000 C. P6,592,000
B. P6, 600, 000 D.P6,000,000
4. Manufacturing equipment
A. P1, 480, 000 C. P1,541,000
B. P1, 507, 000 D. P1,568,000
5. Expenses (excluding depreciation)
A. P68, 000 C. P220,000
B. P44, 000 D. P27,000
SOLUTION 5-28
1. Land
Acquisition price P1, 700, 000

Demolition cost 280, 000
Property tax in arrears 17, 000
Proceeds from sale of salvaged materials (68, 000)
Total cost P1, 929, 000
Answer: B
Answer: D
3. Building
Architect’s fee P 230,000
Excavation cost 150,000
Payments made to construction contractor 6,000,000
Answer: A
4. Manufacturing equipment
Acquisition price P1,480,000
Freight 19,000
Installation 42,000
Answer: C
5. Repairs expense
Answer : D
PROBLEM 5-29
Acquisition and Depreciation
CORNETE MANUFACTURING COMPANY's accounts. At December 31, 2009

included the following balances :
Machinery (at cost) P273, 000

Accumulated depreciation-machinery 144, 600
Vehicles (at cost ; purchased November 21, 2008) 140, 400

Accumulated depreciation-vehicles 58, 968
Land (at cost ; purchased, October 25, 2006) 243, 000
Building (at cost ; purchased October 25, 2006) 557, 160
Accumulated depreciation-building 85, 842
Details of machines owned at December 31, 2009 are as, follows :
Machine Purchase Date Cost Useful Life Residual Value
1 Oct. 7, 2006 P129,000 5 years P7,500
2 Feb. 4, 2007 144, 000 6 years 9,000
Addítional in Formation :
 Cornette calculates depreciation to the nearest month and

uses straight-line depreciation for all depreciable assets
except vehicles, which are depreciated on the diminishing
balance at 40% per annum.
 Cornette's financial year-end is December 31.
 The vehicles account balance reflects the total paid for two
identical delivery vehicles, each of which cost P70, 200.
 On acquiring the land and building, Cornette estimated the
building’s useful life and residual value at 20 years and
P15, 000, respectively
The following transactions occurred from January 1, 2010 :
2010
Jan, 3 Bought a new machine (machine 3) for a cash price of

P171, 000. Freight charges of P1, 326 and installation
costs of P5, 274 were paid in cash. The useful life and
residual value were estimated at five years and P12,
000, respectively.
June 22 Bought a second-hand vehicle for P45,600 cash.
Repainting costs of P1, 965 and four new tires costing
P1,035 were paid for in cash.
Aug. 28 Exchanged machine 1 for office furniture that had a

fair value of P37, 500 at the date or exchange. The
fair value of machine 1 at the date of exchange was
P34, 500. The office furniture originally cost P1. 08,
000 and, to the date of exchange, had been deprciated
by P72, 300 in, the previous owner’s books. Cornette
estimated the office furniture's useful life and
residual value at eight years and P1, 620,
respectively.
Dec. 3 Recorded depreciation.
2011
April 30 Paid for repairs and maintenance on the machinery ·

amounting to P2, 784.
May 25 Sold one of the vehicles bought on November 21, 2008.

for P19, 800 cash.
June 26 Installed a fence around the Property at cost of P16,

500. The fence has an estimated useful life of 10 years
and zero residual value. (Debit the cost to a Land
Improvements asset account
Dec 31 Recorded depreciation.
Jan. 5 Overhauled machine 2 at cost of P36, 000, after which

Cornette estimated its remaining life at one additional
year and revised its residual value to P15, 000.
June 20 Traded in the remaining vehicle bought on November 21,

2008 for a new vehicle. A trade-in allowance of P11,
100 was received and P69, 900 was paid in cash.
Oct. 4 Scrapped the vehicle bought on June 22, 2010, as it had

been so badly damaged in a traffic accident that it was
not worth while repairing it.
Dec. 31 Recorded depreciation.
1. Machine 3, purchased on January 3, 2010, should be recorded at
A. P171, 000 C. P165, 600
B. P177, 600 D. P159, 000
2. The second-hand vehicle purchased on June 22, 2010, should be

recorded at
A. P45, 600 C. P47565
B. P46, 635 D. P48, 600
3. The office furniture acquired on August 28, 2010, should be

recorded at
A. P34, 500 C. P35, 700
B, P37, 500 D. P33, 825
4. The gain to be recognized on the exchange of machine 1 for

office furniture on August 28, 2019, should be
A. P1, 875 C. P3, 675
B, P O D. P675
5. The total depreciation for 2010 is
A. P142, 198 C.P142,716
B. P126, 391 D.P142,591
6. The gain (loss) to be recognized on the sale of vehicle on May

25, 2011, is
A. P (558) C. P558
B. P(4, 630) D. P4, 630
7. The total depreciation expense for 2011, is
A. P112, 987 C. P117, 434
B. P117, 059 D. P116, 430
8. After the overhaul, machine 2's revised annual depreciation is

A. P22, 560 C. P26, 100
B. P50, 192 D. P33, 300
9. What is the cost of the new vehicle acquired on June 20, 2012?
A. P81, 000 C. P58, 800
B. P69, 900 D. P91, 398
10. The total depreciation expense for 2012 is
A. P114, 678 C. P118, 218
B. P118, 593 D. P108, 288
SOLUTION 5-29
1. Cash price P171,000
Freight charges 1, 326
Installation cost 5, 274
Total cost of machine 3 P177,600
Answer: B
2. Cash price P45,600
Repainting cost 1,965
New tires 1,035
Total cost of second-hand vehicle acquired P48,600
Answer, D
3.The office furniture acquired on August 28, 2010, should be

recorded at P34, 500-the fair value other machine given up.
Answer : A
4. Cost machine 1 P129,000
Acctimulatèd depreciation, Oct. 7, 2006-
Aug. 28, 2010 (P129, 000-P7, 500 =
P1291, 500 / 5 x 3 11/12 ) (95,175)

Carrying value 33,825
Fair value 34,500
Gain on exchange P 675
Answer : D
5. Depreciation expense for 2010 :
Buildings ([P557, 160-P15, 0001/20 years) P27,108
Machinery :
1 ((p129, 000-P7,50Ò/5 ×8/12 ) P 16,200
2 ([P144, 000-p9, 00]/6) 22,500
3 ([P177, 600-p12, 000]/5) 33,120 71,820
Vehicles :
Old ([P140,400-P58,9681×400%) P 32,573
New (P48, 600 x 40%X 6/12) 9,720 42,293
Office furniture
([P34, 500-P1, 6201/8 ×4/12 ) 1,370
Total P142,591
Answer : D
6. Proceeds from sale P19,800

Carrying value, Jan. 1
([P81, 432-p32, 573]x ½) P24,430
Depreciation, Jan. 1-May 25
(P24, 430 × 40% X 5/12) (4,072) (20,358)
Loss on sale P (558)
Answer : A
Buildings P 27,108
Machinery :
2 P22,500
3 33,120 55,620
Vehicles :
Old-sold on May 25, 2011 P4,072
Old-still on hand on Dec31
(P24,430x40%) 9,772
New-([P18,600-P9,720]x40%) 15,552 29,396
Office furniture (P32,880/8) 4,110
Land improvements(P16,500/10x6/12) 825
Total P117,059
Answer:B
8. Total Cos of Machine 2 (P114. 000+P36, 000 cost
Of overhaul) P180,000
Accumulated depreciation Feb.4,2007 –
Jan.5,2012
([P144,000-P9,00]/6x4 11/12) 110,625
Revised residual value (15,000)
Remaining depreciable cost P 54,375
Revised remaining life (6-4 11/12 + 1) 25months
Revised annual depreciation
(P54, 375/25 × 12) P26,100
Answer : C
9. Cash paid P69,900

Trade in value of old vehicle 11,100
Total cost of new vehicle P81,000
Answer : A
Buildings P 27, 108
Machinery :
2 P26,100
3 33,120 59,220
Vehicles :
Old-traded-in on June 20
([P24, 430-P9, 772]×40% X 6/12 ) P2,932
Acquired June 20 through trade-in
(P81, 000 × 40% X 6/12) 16,200
Acquired June 22, 2010, scrapped
Oct. 4, 2012 ([p38, 880-P15, 552] X
40% X 9/12) 6,998 26,130
Office furniture 4,110
Land improvements (P16, 500/10) 1,650
Total P118,218
Answer, : C
PROBLEM 5-30
Different Depreciation M8tboòs
Your audit of LYRE COMPANY's property, plant, and equipment

disclosed the following data at December 31, 2010.
A S S E T
J E R I
Original cost P70,000 P102,000 P160,000 P160,000
Year purchased 2004 2005 2006 2008
Useful life 10years 15,000hrs 15years 10years
Salvage value P 6,200 P6,000 P10,000 P10,000
Double-
Depreciation Sum-of- Declining-
Method year’s-digits working hours straight line balance
Accumulated
Depreciation
through 2009 P46,400 P 70,400 P 30,000 P 32,009
You noted that the client's policy on depreciation is that no

depreciation is recorded in the year an asset is purchased, and
full year depreciation is provided in the year an asset is
disposed of.
The following transactions occurred during 2010 :
1. On May 5, Asset J was sold for P26, 000 cash. The

contemporary’s book keeper recorded this retirement in the
following manner in the cash receipts journal :
Cash 26, 000
Asset J 26,000
2. On December 31, it was determined that Asset E had been used

2, 100 hours during 2010.
3. On. December 31, before computing depreciation expense on
Asset R,-the management of Lyre decided the useful life remaining
from January 1, 2010, was 10 years.
4. On December 3, before it was discovered that a plant asset

purchased in 2009 had been expensed completely in the year, This
asset costs P44, 000 and has a useful life of 10 years and no
salvage value. Management has decided to use the double-declining
balance method for this asset, which can be referred to as "Asset
C".
1. The 2010 depreciation expense on Asset J is
A. P6, 960 C. P6, 364
B. P18, 229 D. P5, 800
2. The gain to be reported on the sale of Asset J is
A. P8, 200 C. P8, 764
B. P9, 360 D. P O
3. The 2010 depreciation expense on Asset E is
A. P17, 600 C. P13, 440
B. P19, 440 D. P14, 280
4. The 2010 depreciation expense on Asset R is
A. P17, 143 C. P13, 000
B. P12, 000 D. P5, 455
5. The total depreciation expense in 2010 on the above-mentioned

PPE items is
A. P55, 640 C. P66, 800
B. P63, 880 D. P66, 640
6. Prepare the necessary adjusting journal entries for the year

2010, including the appropriate depreciation expense on the
abovementioned items.
SOLUTION 5-30
1. 2010 Depreciation expense-Asset J
Cost P70,000
Less : Salvage value 6,200
Depreciable cost 63, 800
SYD (10 X 10+1/2) x 5/55
Depreciation P 5,800
Answer: D
2. Cost of Asset J P 70,000
(P46, 400 + P5, 800) 52,200
Book value 17,800
Proceeds from sale 26,000
Gain on sale P 8,200
Answer : A
3. 2010 Depreciation expense-Asset E
(P102, 000-P6, 000 · P96, 000 x 2, 100/15, 000)
Answer, C
4. 2010 Depreciation expense-Asset R

Cost P160,000
Less : Accumulated depreciation, Jan. 1, 2010 30,000
Book value, Jan. 1, 2010 130,000
Less : Salvage value 10,000
Remaining deprceiable·cost, Jan. 1, 2010 120,000
Revised remaining life / 10yrs
Revised annual depreciation P 12,000

Answer, B
5. 2010 Depreciation expense :
Asset J P 5,800
Asset E 13,440
Asset R 12,000
Asset I
Cost P160,000
Accum. Depreciation, Jan 1, 2010 32,000
Book value, Jan. 1, 2010 P128,000
DDB3 rate (1/10 x 2) x 20% 25,600
Asset C
Cost P 44,000
DDB rate(1/10 x2) x 20% 8,800
Total P65,640
Answer: A
6. ADJUSTING IOURNAL ENTRIES

December 31, 2010
1. Depreciation expense-Asset J 5,800
Accurnulated depreciation-Asset ) 5,800
2. Accumulated depreciation-Asset j 52,200
Asset J 44,000
Gain on sale of Asset I 8,200
3. Depreciation expense-Asset E 13,440
Accmulated depreciation-Asset E 13,440
4. Deprecatio expense- Asset R 12,000

Accmulated depreciation-Asset E 12,000
5. Asset C 44,000
Retained earnings 44,000
6. Depreciation expense : 8,800
Accumulated depreciation – Asset C 8,800
7. Depreciation expense : 25,600
Accumulated depreciation – Asset 1 25,600
PROBLEM 5-31
PPE Acquisition and Depreciation
The following data pertain to UKULELE CORPORATION's property

plant, and equipment for 2010.
Audited balances at December 31, 2009 :
DEBIT CREDIT
Land P 7,500,000
Buildings 30,000,000
Accumulated depreciation-Buildings 6,577,500
Accumulated depreciation
Delivery equipment 5,750,000
Accumulated depreciation
Delivery equipment 4,230,000
Depreciation data :
Depreciation Method Useful Life
Buildings 150% declinging-balance 25years

Machinery ánd Equipment Straight-line 10years
Delivery Equipment Sum-of-the-year’s-digit 4years
Leasehold improvements Straight-line
Transactions during 2010 and other information are as follows :
a) On January 2, 2010, Ukulele purchase-d a new truck for P1,

000, 000 cash and trade-in of a 2-year-old truck with a cost
of P900, 000 and a book value-of P270, Q00. The new truck
has a cash price of P1, 200, 000 ; the market value of the
trade-in is not known.
b) On April 1, 2010, 2005, was stolen. company. a machine
purchased for P575, 000 on April 1, Ukulele recovered P387,
500 from its insurance
c) On May 1, 2010, costs of P8, 400, 000 were incurred to
improve leased office premises. The leasehold improvements
have a useful life of 8 years. The related lease terminates
on December 31, 2016.
d) On July 1, 2010, machinery and equipment were purchased at a
total invoice cost of P7, 000, 000 ; additional costs of
P125, 000 for freight and P625, 000 for installation were
incurred.
e) Ukulele determined that the delivery equipment comprising
the P5, 750, 000 balance at January 1, 2010, would have been
depreciated at a total amount of P900, 000 for the year
ended December 31, 2010.
The salvage values of the depreciable assets are immaterial. The

policy of Ukelele Corporation is to compute depreciation to the
nearest month.
ßased on the preceding information, compute the following : ·
1. Depreciation expense for 2010 on Buildings

A. P1, 405, 350 C. P1, 200, 000
B. P929, 700 D. P1, 800, 000
2. Depreciation expense for 2010 on Machinery and equipment
A. P2, 637, 500 C. P2, 651, 875

B P2, 981, 875 D. P2, 594, 375
3. Depreciation expense for 2010 on Delivery equipment
A. P1, 110, 000 C. P1, 380, 000
B. P1, 200, 000 D. P1, 020, 000
4. Depreciation expense for 2010 Of Leasehold improvements
A. P700, 000 C.P840, 000
B. P1, 050, 000 D. P933, 333
5. Accumulated deprecî3tion-Buildings, December 31, 2010
A. P7, 507, 200 C. P7, 77, 500
B. P7, 982, 850 D. P8, 377, 500
6. Accumulated depreciation-Machinery and equipment, December 31,

2010
A. P8, 644, 375 C. P8, 600, 000
B. P8, 556, 875 D. P8, 844, 375
7. Accumulated depreciation-Delivery equipment, December 31, 2010
A. P5, 430, 000 C. P, 710, 000
B. P4, 620, 090 D. P4, 800, 000
8. Gain (loss) on trade in of truck on January 2, 2010
A. P(200, 000) C. P(70, 000)
B. P200, 000 D. P70, 000
SOLUTION 5-31
1. 2010 DEPRECIATION EXPENSEON BUILDINGS :

Book value, Jan. 1, 2010
(P30, 000, 000-P6, 577, 500) P23,422,500
150% declining balance rate (1/25x 150%) x 6%
Depreciation expense for 2010 P 1,405,350
Answer : A
2. 2010 DEPRECIATION EXPENSE ON MACHINERY & EQUIPMENT :

Machinery and equipment
Jan. 1, 2010 P22,500,000
Less : machine stolen 575,000
Balance P21,925,000
Depreciation rate x 10% P2,192,500
Machine stolen July 1(P7,750, 000× 10% X 6/12) 387,500
Depreciation for 2010 P2,594,375
Answer : D
3. 2010 DEPRECIATION EXPENSE ON DELIVERY EQUIPMENT :

Depreciation on Jan. 1, 2010, balance P900,000
Less : Depreciation on truck traded in,
Jan. 1, 2010 (P900, 000 × 2/10 *) 180,000 P 720,000
Depreciation on truck purchased
Jan. 2, 2010 (P1, 200, 000 × 4/10 *) 480,000
Depreciation for 2010 P1,200,000
* SYD = 4 (4+1 / 2)= 10
Answer : B
4. 2010 DEPRECIATION EXPENSE ON
LEASEHOLD IMPROVEMENTS :
Cost of leasehold improvements P 8, 400, 000

Depreciation period, May 1, 2010-Dec. 31, 2016 / 80 mo
Depreciation per month P 105, 000
Depreciation, May 1, 2010-Dec. 31, 2010
(P105, 000 × 8 months) P 840,000
Answer : C
5.ACCUMULATED DEPRECIATION-BUILDINGS
Balance, Jan. 1, 2010 P6,577,500
Add : Depreciation for 2010 (see no. 1) 1,405,350
Balance, December 31, 2010 P7,982,850
Answer : B
6. ACCUMULATED DEPRECIATION - MACHINERY & EquiPMENT :
Balance, Jan. 1, 2010 P6,250,000
Depreciation for 2010 (see no. 2) 2,594,375
Machine stolen (P575, 000/10 X5) (287,500)
Balance, Dec. 31, 2010 P8,556,875
Answer : B
7. ACCUMULATED DEPRECIATION - DELIVERY EQUIPMENT :
Balance, Jan. 1, 2010 P4,230,000
Depreciation for 2010 (see no. 3) 1,200,000
Truck traded in
(P900, 000 cost-P270, 000 boole value) (630,000)
Balance, Dec. 31, 2010 P4,800,000
Answer : D
8.LOSS oN TRADE IN OF TRUCK oN JANUARY 2, 2010 :
Trade in value (P1, 200, 000-P1, 000, 000) P200,000
Book value 270,000
Loss on trade in P(70,000)
Answer : C
PROBLEM 5-32
Depreciation and Maintenance Charges of Machine Components
SNARE DRUM COMPANY buys a machine for P228, 600 on January 1,

2007. The maintenance costs for the years 2007-2010 arë as
follows :
Year Cost
2007 P13,500
2008 10,800
2009 65,700*
2010 18,900
*includes P54, 900 for cost of a new motor installed in December

2009.
Snare Drum recorded the cost of the machine frame in one account
at a cost of P176, 400 and the motor was recorded in a second
account at a cost of P52, 200. Straight-line method of
depreciation is used with a useful liFe of 10 years for the frame
and 4 years for the motor, Residual values are immaterial and
thus ignored in the computation of depreciation charges.
1. What is the total expense related to the machine in 2007?

A. P44, 190 C. P70, 650
B. P30, 690 D. P36, 630
2. What amount of loss should be recognized on the replacement

of motor in 2009?
A. P10, 800 C. P26, 100
B. P13, 050 D. P O
3. What is the depreciation expense in 2009?
A. P31, 365 C. P30, 690
B. P17, 640 D. P44, 415
4. What is the total expense related to the machine in 2009?

A. P54, 540 C. P89, 775
B. P41, 490 D. P42, 165

5.What is the total expense related to the machine in 2010?
A. P42, 030 C. P52, 965
B. P31, 365 D. P50, 265
SOLUTION 5-32
1. Depreciation expense-frame (P176, 400/10) P17,640

Depreciation expense-motor (P52, 200/4) 13,050
Maintenance expense 13,500
Total expenses in 2007 P44,190
Answer : A
2. Cost of motor P 52,200
( P52, 200 × 3/4) 39,150
Book value/Loss on replacement P 13,050
Answer:B

Total depreciation expense in 2009 P30,690
Answer:C
4. Depreciation expense (see no.3) P30,690

Loss on replacement of motor(see no.2) 13,050
Maintenance expense(P65,700-P54,900) 10,800
Answer:A
Maintenance expense 18,900
Answer:D
PROBLEM 5-33
Computation of Depreciation
BUGLE-COIx1FANY's property, plant, and equipment and related

accumulated depreciation accounts had the following balances at
December 31, 2009:
Accumulated
Class of PFE Cost Depreciation
Land P 3,900,000
Buildings 36,000,000 P7,962,000
Machinery and equipment 23,250,000 5,886,000
Transportation equipment 3,960,000 2,586,000
Leasehold improvements 6,630,000 3,315,000
Class of PPE Depreciation Method Useful Life
Land improvements Straight-line 12 years
Buildings · 150%declining balance 25 years
Machinery and equipment Straight-line 10 years
Transportation equipment 150% declining balance 5 years
Leasehold improvements Straight-line 8 years
Bugle computes depreciation to the nearest month. The salvage

values of the depreciable assets are considered immaterial,
Transactions during 2010 and other information are described

below:
a) On January 5, 2010, a plant facility consisting of land and

a building was purchased from Torotot Company for
P18,000,000. Of this amount, 20% was allocated to land
b) On April 3, 2010, new parking lots, streets, and sidewalks
at the purchased plant facility were completed at a total
cost of P5,760,000. These expenditures had an estimated
useful life of 12 years
c) The leasehold improvements were completed on December 3i,
2006, and had an estimated useFul life of 8 years. The
related lease, which would have terminated on December 3i,
2012, was renewable for an additional 4-year term April 30,
2010, Bugle exercised the renewal option.
d) On July 1, 2010, machinery and equipment were purchased at a

total invoice cost of P7, 500, 000. Additional costs or
P300, 000 for delivery and P900, 000 for installation were
incurred.
e) On August 31, 2010, Bugle purchased a new automobile for
P450, 000.
f) On September 29, 2010, a truck with a cost of P720, 000 and

a carrying amount of P243, 000 on the date of sale was sold
for P345, 000. Depreciation for the 9 months ended September
30, 2010, was P70, 560.
g) On December 22, 2010, a machine with a cost of P510, 000 and
a carrying amount of P89, 250 at date of disposition was
scrapped without cash recovery.
Based on the preceding information, calculate the 2010

depreciation exPense on each of the following classes of PPE.
1. Land Improvements
A. p480, O00 C. P320,000
B. P360, 000 D. P120,000
2.Buiidings
A. P2, 546, 280 C. P2, 762, 280
B. P3. 024,000 D.P1,682,280
3. Machinery and equipment
A. P2,325,000 C. P1,597,500
B. P3,195,000 D. P2,760,000
SOLUTION 5-3 3
1. 201O DEPRECIATION EXPENSE-LAND IMPROVEMENTS :
(P5,760,000/12yearsx9*12) P360,000
*April 1 – December 31
Answer:B
2. 2010 DEPRECIATION EXPENSE-BUILDINGS :
Book value, Jan.1,2010(P36,000,000-P7,962,000) P28, 038,000
Book acquired Jan.5,2010(P18,000,000×80%) 14, 400,000
Total 42, 438,000
150 % declining balance rate (1/25 x 150%) X6%
Depreciation P 2, 546, 280
3. 2010 DEPRECIATION EXPENSE-MACHINERY AND EQUIPMENT:
Machinery and equipment, Jan. 1 2010
(P2, 233, 000/10 years) P2, 325, 000
Purchased July 1, 2010(P8,700,000/10x6/12) 435, 000
Total P2, 760, 000
4. 2010 DEPRECIATION EXPENSE-TRANSPORTATION EQUIPMENT
Book value, Jan. 1,2010
(P3,960,00-P2,586,000) P1,374,000
Less: Book value on Jan.1,2010
Of truck sold Sep.29, 2010
(P243,000 + P70,560) 313,560
Amount subject to depreciation 1,060,440
150% declining balance rate
(1/5 x 150%) x 30% P318,122
Truck sold Sept. 29,2010 70,560
Automobile purchase Aug31,2010
(P450,000 x 30% x 4/12) 45,000
Total P433,692
Answer : C
5.2010 DEPRECIATION EXPENSE-LEASEHOLD IMPROVEMENTS:
Book value, Jan. 1, 2010(P6,630,000-P3,315,000) P3,315,000

Useful life of leasehold improvements (8-3) / 5 years
Depreciation P 663,000
Answer:C
The useful life of leasehold improvements is used because it is

shorter than the extended lease term of 6 years(2years remaining
lease term + 4years renewal option exercised).
PROBLEM 5-34
Depreciation and Error Correction
The Delivery trucks account of your client, ALPHORN COMPANY, had

a balance of P2, 820, 000 on January 1, 2007, which included the
following :
Truck No. Acquisition Date Cost
1 January 1, 2004 p 540,000
2 July 1, 2004 660,000
3 January 1, 2006 900,000
4 July 1, 2006 720,000
P 2,820, 000
The Accumulated depreciation-Delivery trucks account had a

balance of 0906, 000 on Jar, uai-f 1, 207. This aï11ount
represents depreciation on tine four trucks Front the res :
respective dates of acquisition, based on a 5- year life, no
salvage value. No charges had been made against this account
before January 1, 2007.
Transactions completed during the period January 1, 2007 throúgh

December 31, 2010,'and the entries made to record them were as
follows :
July 1, 2007
Truck No. 3 was traded for a larger one-(Truck No. 5), the agreed
price of which was P1, 020, 000. Alphorn paid the dealer P500,
000 cash on the transaction. The entry was :
Delivery trucks 500,000
Cash 500,000
January 1, 2008
Truck No. 1 was sold for P110, 000. The entry was :
Cash 110,000
Delivery trucks 110,000
July 1, 2009
A new truck (No. 6) was purchased for P1, 080, 000 cash and was
debited at that amount to the Delivery trucks account. (Assume
Truck No. 2 was not retired.)
July 1, 2009
Truck No. 4 was severely damaged in an accident and was sold as

junk for P21, 000 cash. Alphom received P75, 000 from the
insurance company. Thee entry mâde by the accountant was :
Cash 96, 000
Sales 21,000
Deliver trucks 75,000
Entries for depreciation had been made at the end of edch

financial year as follows :
Year Depreciation Expense
2007 P609,000
2008 633,000
2009 733,000
2010 834,000
1. What amount of gain (loss) should have been recognized on the

trade in of Truck No. 3 on July 1, 2007?
A. P(130, 000) C. P(110, 000)
B. P230, 000 D. P O
2. Alphom's net income for 2007 was overstated (understated) by
A. P77, 000 C. P(33, 000)
B. P1 10, 000 D. P33, 000
3. The gain (loss) on the sale of Truck No. 1 on January 1, 2008,

was
A. P110, 000 C. P(108, 000)
B. P2, 000 D. P(2, 000)
4. Alphorn's net income for 2008 was understated by
A. P155, 000 C. P2, 000
B. P153, 000 D. P151, 000
5. What amount of loss Should have been recognized on the sale of

Truck No. 4 on July 1, 2009?
A. P267, 000 C. P288, 000
B. P192, 000 D. P213, 000
6. Alphorn's net income for 2009 was overstated (understated) by
A. P213, 000 C. P(283, 500)
B. P(70, 500) D. P(213, 000)
7. What amount of depreciation should have been recorded in 2010?
A. P414, 000 C. P420, 000
B. P552, 000 D. P834, 000

SOLUTION 5-34
1. Trade in value (P1, 020, 000-P500, 000) P520,000

Book value of Truck No. 3 :
Cost P900,000
Less : Accumulated depreciation,
Jan. 1, 2006-july 1, 2007
(P900, 000/5 × 1 1/2 years) 270,000 (630,000)
Loss on trade in P(110,000)
Answer : C
2. Depreciation per client
Correct depreciation :
Truck No. 1 (P540,000/5) P108, 000
Truck No. 2 (P660, 000/5) 132, 000
Truck No. 3 (P900, 000/5 × 1/2) 90, 000
Truck No. 4 (P720, 000/5) 144, 000
Truck No. 5 (P1, 020, 000/5 × 1/2) 102, 000 576,000
Overstatement of depreciation –
net income understated (33,000)
Unrecorded toss on trade in-net income overstated 100,000
Net overstatement of 2007 net income P 77,000
Answer : A
3. Net proceeds P110,000
Cost P540,000
Jan. 1, 2004-Jan. 1, 2008

(P540, 000/5 × 4) 432,000 (108,000)
Answer : B
4. Depreciation per client P633,000

Truck No. 1 (P540,000/5) P108, 000
Truck No. 2 (P660,000/5) 132, 000
Truck No. 3 (P900,000/5 x 1/2) 90, 000
Truck No. 4 (P720, 000/5) 144, 000
Truck No. 5 (P1,020,000/5 x 1/2) 102, 000 576,000

Overstatement of depreciation –
Unrecorded gain on sale-net income overstated 100,000
Net understatement 2007 net income P 77,000
Answer : A
6. Net proceeds P21,000
Cost P720,000
July 1, 2006-July 1, 2009
(P720, 000/5 × 3) 432,000 (288,000)
Loss on sale P(267,000)
Answer : A
7. Depreciation per client P733,500

Truck No. 2 (P660, 000/5 × 1/2) P66,000

Truck No. 4 (P720, 000/5 × 1/2) 72,000
Truck No. 5 (P1, 020, 000/5) 204,000
Truck No. 6 (P1, 080, 000/5 ×1/2) 108,000 450,000
Over statement of depreciation –
Unrecorded loss on sale-net income overstated 267,000
Unrecorded gain on insurance recovery-net income
understated (75,000)
Erroneous credit to sales-net income overstated 21,000
Net understatement 2009 net income P (70,500)
Answer. B
7. 2010 Depreciation expense :
Truck No.5(P1,020,000/5) P204,000
Truck No.6(P1,080,000/5) 216,000
Total P420,000
Answer:C
PROBLEM 5-35
Acqusîtion and Depreciation of Various PPE Iteuts
BAGPÏPE MANUFACTURING COMPANY began operations on October 1,

2008. The company's accountant has started to gather pertinent
information about each of the company's property, plant, and
equipment as shown below. When he was about to prepare a schedule
of PPE and deprecation, he was assigned to maintain the books of
the company's foreign operations. You have been asked to assist
in the preparation of this schedule. In addition to ascertaining
that the summarized data below are correct, you have accumulated
the following information from the company's records and
personnel.
a) Bagpipe computes depreciation from the first of the month of
acquisition to the first of the month of disposition.
b) Land A and Building A were purchased from Pobre Company.

Bagpipe paid P12, 300, 000 for the land and building together. At
the time of acquisition, the land r, ad a fair value of ;'1, 350,
000, and the building had a fair value of P12,150, 000.
c) Land B was acquired on October 3, 2008, in exchange for 37,

500 ordinary shares of Bagpipe. On the acquisition date, Land B
had a fair value of P1, 125, 000 and the company's P5 par value
ordinary shares had a fair value of P35 per share. Bagpipe paid
P240, 000 to demolish an old building on this land for the
construction of a new building.
d) Construction of Building B on the newly acquired land began on

October 1, 2009. By September 30, 2010, Bagpipe had paid
P4,800,000 of the estimated total construction costs of
P6,750,000.It is estimated that the building will be completed
and occupied by July 2011.
e) Certain equipment was donated to the corporation by the

national government. An independent appraisal of the equipment
when donated placed the fair market value at P450,000 and the
salvage value at P45,000
f) Machinery A's total cost of P2, 473, 500 includes installation

cost of P9, 000 and normal repairs arid maintEnance of P223,
500 . Salvage value is estimated at P90, 000. It was sold on
February 1, 2010 for P1, 600, 000.
g) On October 1, 2009, Machinery B was acquired with a down

payment of P86, 100 and the remaining payments to be made in 11
annual installments of P90, 000 each, beginning October 1, 2009.
The prevailing interest rate was 89o. The following data were
abstracted from present value tables (rounded) :
10 years 11 years 15 years
Present value of 1 at 8% 0.463 0.429 0.315
Present value of an ordinary
annuity of 1 at 8% 6.710 7.139 8.559

Land A
Acquisition date : October 1, 2008
Building A
Salvage value : P600,000
Depreciation method : Straight-line
Year ended Sept. 30, 2009 P261,750
Land B
Building B
Acquisition date : Under construction
Cost: P4,800,000 to date
Depreciation method : Straight-line
Salvage value : P 0
Estimated life : 30 years
Year ended Sept. 30, 2009 P 0
Donated equipment
Depreciation method : 150% declining balance
Machinery A

Depreciation method : Sum-of-the-years’-digit (SYD)
Machinery B
Acquisition date: October 1, 2009
Salvage value : P 0
Depreciation method : Straight - line
1. What is the cost of Land A?
A. P1, 350, 000 C. P11,070,000
B. P12, 150, 000 D. P1,230,000
2. What is the cost of Building A?
A. P1, 35, 000 C. P11,070,000
B. P12, 150, 000 D. P1,230,000
3. What is the estimated useful life of Building A?
A. 42 years C. 44 years
B. 40 years D. 46 years
4. What is the depreciation expense on Building A for the year

ended September 30, 2010?
A. P261, 750 C. P523, 500
B. P288, 750 D. P577, 500
5. What is the cost of Land B?
A. P1, 552, 500 C. P1,364,000
B. P427, 500 D. P1,125,000

6. What is the-depreciation expense on Building B for the year
A. P 1 20, 000 C. P288, 750
B. P168, 750 D. P 0
7. At what amount should the donated. Equipment be measured and
Recognized?
A. P450, 000 C. P495, 000
B. P405, 000 D. P O
8. What is the depreciation expense on the donated equipment for

the year ended September 30, 2009?
A. P O C. P60, 750
B. P74, 250 D. P67, 500
9. What is the depreciation expense on the donated equipment for

the year ended September 30, 2010?
A. P60, 750 C. P57, 375
B. P51, 638 D. P67, 500
10. What is the cost of Machinery A?
A. P2, 473, 500 C. P2, 160, 000
B. P2, 250, 000 D. P2, 151, 000
11. What is the depreciation expense on Machinery A for the year

A. P500, 000 C.P480, 000
B. P529, 667 D. P478, 000
12. What. Is the depreciation expense on Machinery A for the year

A. P140, 000 C. P140, 926
B. P113, 426 D. P175, 000

13. What amount of gain (loss) should be recognized on the sale
of Machinery on February 1, 2010?
A. P O C.P5, 000
B. P60, 000 D. P(30, 000)
14. What is the cost of Machinery B?
A. P728, 610 C. P780, 000
B. P731, 670 D. P685, 434
15. What is the depreciation expense on Machinery B for the year

A. P36, 430 C. P36, 584
B. P39, 000 D. P34, 272
SOLUTION 5-35
1. Allocation of lump sum price in proportion to fair values:

Land A(135/1,350xP12,300,000) P1,230,000
Building A(1,215/1,350xP12,300,000) 11,070,000
Total P12,300,000
Answer: D
2. Cost of building(see no.1)
Answer: C
3. Cost of building a 11,070,000

Less: Salvage value 600,000
Depreciable cost 10,470,000
Annual depreciation / 261,750
Estimated Life 40 years
Answer:B
4. Depreciation expense on Building A for the year
Ended Sept.30,2010
Answer: A
5. Fair value of Land B on acquisition date P1,125,000
Cost of demolition of old building 240,000
Total cost of Land B P1,365,000
Answer:C
6. Because Building B is not yet available for its intended use
as of Sept.30,2010 no depreciation should be provided
Answer: D
7. Donated equipment, at fair value
Answer: A
8. Depreciation expense-Donated equipment, for thc year ended
September 30, 2009 :
Cost P450, 000
150% declining balance rate (1/10 x 150%) x 15%
Depreciation expense P 67,500
Answer : D
9. Depreciation expense-Donated equipment, for the year ended
Book value, Oct. 1, 2009 (P450, 000-P67, 500) P382, 500

150% declining balance rate (1/10 X 150%) X 15%
Depreciation expense P 57,375
Answer:C
10. Total cost as recorded P2,473,500
Less : · Normal repairs and maintenance 223,500
Correct cost of Machinery A P2,250,000
Answer. · B
11. Depreciation expense machinery A, for the year ended:

( P2, 250, 000-P90, 000 = P2, 160,000 x 8/36) P480,000
Answer : C
12.Depreciatiotl expense-Machinery 1, or the year ended

September 30, 2010
Answer : A
13. Cost of Machinery A P2,250,000
Less : Accumulated depreciation, October 2008-
january 2010 (P480, 000 + P140, 000) 620,000
Book value, February 1, 2010 1,630,000

Proceeds from sale 1,600,000
Loss on sale P(30,000)
Ánswer. D
14. Down payment P86,100
First installment payment on Oct. 1, 2009 90,000
Present value of succeeding 10 installment payments
(P90, 000 × 6. 710) 603,900
Total cost of Machinery B P780,000
Answer : C
15. Depreciation expense-Machinery B,
for the year ende'd September 30, 2010
(P780, 000/20 years) P39,000
Answer : B
PROBLEM 5-36
Acquisition anò Disposition of Equipment
You are engaged to audit the financial statements of CORNET

COMPANY for the year ended December 31, 2010. You gathered the
following information accounts. formation pertaining to the
company's equipment and accumulated depreciation accounts
EQUIPMENT
1.1.10 Balance P446, 000 9.1.10 No.6 sold P9,000
6.1.10 No.12 36, 000 12.31.10 Balance 474,000
9.1.10 Dismantilling
Of No.6 1,000
P483,000 P483,000
ACCUMULATED DEPRECIATION-EQUIPMENT
12.31.10 Balance P271, 400 1.1.10 Balance P 224, 000
12.31.10 2010
depreciation 47, 400
P271,400 P271,400
The following are the details of the entries above :
1. The company depreciates equipment at 10 percent per annum.

oldëst equipment. owned is. seven years old as of December
2010.
2. The following adjusted balances appeared on your last

year’s working papers :
Equipment P446,000
3. Machine No. 6 wab purchased on March 1, 2003 at cost of P30,

000 and was sold on September 1, 2010, for P9, 000.
4. included in charges to the repairs expense accoiln ;. , : S an

invoice covering installation of Machine No. 12 in. The amount of
P2, 500.
5. It is the company's practice to take a full year's

depreciation in thE year of acquisition and none in the year of
disposition.
1. What is the gain (loss) on the sale of Machine No. 6?
A. P(4, 000) C. P(1, 000)
B. P8, 000 D. P O
2. · What is the equipment account balance on December 31, 2010?
A. P454, 500 C. P475, 500
B. P452, 000 D. P484, 500

3. What is the total depreciation expense on equipment for the
year ended December 31, 2010?
A. P44, 600 C. P51, 450
B. P45, 846 D., P45, 450
4. What adjusting entry should be prepared in connection with the

sale of Machine No. 6 on September 1, 2010?
A. Loss on sale of equipment 1, 000
Accumulated depreciation 21, 000
Equipment 22, 000

B. Loss on sale of equipment 4, 000
Equipment 22, 000

C. Accumulated depreciation 21, 000
Equipment 21, 000
D. Accumulated depreciation 30, 000
Equipment 22, 000
Gain on sale of equipment 8, 000
5. What adjusting entry should ld be prepared on December 31,

2010, to correct the amount of depreciation recorded on
company books?
A. Accumulated depreciation 1, 950
Depreciation expense 1, 950
B. Accumulated depreciation 2, 800
Depreciation expense 2, 800
C. Accumulated depreciation 1, 554
Depreciation expense 1,554
D. Depreciation expense 4, 050
SOLUTION 5-36
1. Net proceeds (P9, 000-P1, 000) P8,000

Book value of Machine No. 6 :
Cost P30, 000

(P30, 000 × 10% × 7) 21,000 (9,000)
Loss on sale of Machine No. 6 P(1,000)
Answer : C
2. Equipment :
Balance, Jan. 1, 2010 P446,000
Machine No. 12 purchased June 1, 2010
(P36, 000 + p2, 500) 38,500
Machine No. 6 sold September 1, 2010 (30,000)
Balance December 31, 2010 P454,500
3. Depreciation expense on equipment for 2010 :
(P454, 500 × 10%)
Answeer : D
4.Sale of Machine No. 6 on September 1, 2010 :
Entries made :
Equipment 1,000
Cash 1,000
To record the dismantling cost.
Cash 9, 000
Equipment 9,000
To record the sale of Machine No. 6.
Correct entry :
Cash(P9,000-P1,000) 8,000
Loss on sale of equipment 1,000

Equipment 30,000
Adjusting journal entry:
Loss on sale of equipment 1,000
Equipment 22,000
Answer : A
5. Depreciation recorded P47,400
Correct depreciation (see no. 3) 45,450
Overstatement of depreciation P 1,950
Adjusting journal entry :
Depreciation expense 1,950
Answer : A
PROBLEM 5-37
Equipment Acquired Under Finance Lease
(Lessee Has a purchase Optìon)
HORNPIPE COMPANY has a long-standing policy of acquiring company

equipment by leasing. On January 1, 2009, the company entered
into a -lease for a new machine. The lease contract provides that
annual payments will be made for 5 years. The payments are to be
made in advance on December 31 or each year. At the end of the 5-
year period, Hornpipe may purchase of machine. Tile estimated
econoomic life of the machine is 12 years. Hornpipe uses the
calendar year for reporting purposes · and depreciates its other
equipment using the straight-line method.
In addition, the following information about the lease is also
available :
Annual lease payments P165,000
Purchase option price 75,000
Estimated fair market value of the machine
after 5 years 1,125,000
Interest rate implicit in the lease 10%
Date of first lease payment January 1, 2009
The following data are abstracted from the present value

tables :
Present value of 1 for 5 periods at 10% 0.62092
Present value of an annuity due for
5 periods at 10% 4.16986
Present value of an ordinary annuity for
5 periods at l0% 3.79079
1. What is the amount to be capitalized as an asset for the lease

of the machine
A. P672, 049 C. P734, 596
B. P837, 232 D. P763, 027
2. What is the amount of interest expense to be recognized for

the year ended December 31, 2010?
A. P46, 156 C. P34, 271
B. P56, 960 D. P103, 116
3. How much depreciation should be provided on the leased

equipment for the year ended December 31, 2010?
A. P63, 586 C. P146, 920

B. P56, 004 D. P61, 216
4. What is the entry to record the lease payment on December 31,

2009?
A. Lease liability 108, 040
Interest expense 56, 960
Cash 165, 000
B. Lease liability 118, 844
Cash 165, 000
C. Lease liability 165, 000
Cash 165, 000
D. Lease liability 130, 728
Cash 165, 000
Assume the purchase option is exercised at the end of the lease.

The actual fair market value of the machine at the end of the
lease is P285, 000. On the date the purchase option is exercised,
the undiscounted sum of future cash flows expected from the
machine is P375, 000.
5.What is the entry to record the exercise of the option?
A. Lease liability 68, 181
Cash 75,000
B, Equipment 68, 181
Cash 75,000
C. Equipment 75, 000

Cash 75,000
D. Lease liability 75, 000
Cash 75,000
6.What is the amount of impairment loss that should be recognized

by Hornpipe?
A. P90, 000 C. P53, 514
B. P143, 514 D. -P O
SOLUTION 5-37
1. Present value of lease payments
(P165, 000 × 4. 16986) P688,027
Present value of purchase option price
(P75, 000 × 0. 62092) 46,569
Cost or leased machine P734,596
Ånswer : C
2. SCHEDULE OF LEASE PAYMENTS AND INTEREST ACCRUALS
Interest Lease
Date Payment Expense Principal Liablity
01.01.09 Initial balance P734,596
01.01.09 P165,000 P165,000 569,596
12.31.09 165,000 P56,960 108,000 461,556
12.31.10 165,000 46,156 118,844 342,712
12.31.11 165,000 34,721 130,729 211,983
12.31.12 165,000 21,198 143,802 68,181
12.31.13 75,000 6,819* 68,181 0

*rounded
Interest expense for 2010(see amort schedule) P46,156
Answer : A
2461512
3. Depreciation expense for 2010

(P734, 596/12* years) P61,216
*Because of the bargain purchase option, the depreciation period

should be the useful life of the asset.
Answer : D
4. Enter to record the second lease payment on December 31,

2009:
Lease liability 108,040
Cash 165, 000
Answer:A
5.Entry to record the purchase of the machine :
Lease liability 68,181
Cash 75, 000
Answer : A
6. Fair value of equipment P285,000

Carrying amount :
Cost P734,596
Less : Accumulated depréciation
(P734, 596/12 × 5) 306,082 428,514

Impairment loss P143,514
Answer, B
The fact that the undiscounted sum of future cash flows expected
from the machine is lower than the machine’s carrying amount
indicated an impairment in value of the asset. However, PAS 36:
Impairment of Assets, provies that the impairment loss to be
recognized is the excess of the asset’s carrying amount over its
recoverable amount. The asser’s recoverable amount is the higher
between its fair value less csts to sell and its value in use.
Value in use is the present value of the future cash flows
expected to be derived from the asset.
PROBLEM 5-38
Equipment Acquired Under Finance Lease
(Lese Guarantees the Asset’s Residual Value)
It has been the policy of VIBRAHARP COMPANY to acquire equipment

by leasing. On January 1, 2009, Vibraharp entered into a lease
with Lessor Company for a new delivery truck that had a selling
price of P1, 060, 000. The · lease contract provides that annual
payments of P210, 000 will be made for 6 years. Vibraharp made
the first lease payment on January 1, 2009, and subsequent
payments are made on December'31 of each year. Vibraharp
guarantees a residual value of P183, 560 at the end of the lease
term. After considering the guaranteed residual value, the rate
implicit in the lease is determined to be 129o. Vibraharp has an
incremental borrowing rate of 139o. The economic life of the
truck is 9 years.
Vibraharp depreciates its other equipment using the straight-line

method and uses the calendar year for financial reporting
purposes.
The present value tables show the followíng data :
12% 15%
Present value of 1 for 6 periods 0.50663 0.43233
Present value of an ordinary annuity

for 6 periods 4.11141 3.78448
Present value of an annuity due for
6 periods 4.60478 4,35216
1. What is the cost of the leased delivery truck?

A. P993, 312 C. P956, 393
B. P1, 060, 000 D. P874, 100
2. What is the depreciation expense to be recognized by Vibraharp

for the year ended December 31, 2009?
A. P146, 073 C. P97, 382
B. P 176, 667 D. P134, 959
3. What is the balance of the lease liability on December 31,

2012?
A.P163, 193 C. P169, 940
B. P485, 565 D. P333, 833
4. What is the carrying amount of the leased delivery truck on

December 31, 2013?
A.P730, 365 C. P183, 560
B. p1, 060, 000 D. P329, 635
5. What is the total amount of expenses that should be shown on

Vibraharp's income statement for the year ended December 31,
2014, in connection with this lease?(Assume that Lessor Company
sells the truck for P1t6, 000 at the end of the 6-year period to
a third party.)
A. P233, 302 C.P19,667
B. P146, 075 D.P165,742
SOLUTION 5-38
1. Present value of lease payments

(P210, 000 × 4. 60478) P967,003
Present value of guaranteed residual value
(P183, 560 × 0. 50663) 92,997
Cost of leased delivery truck P1,060,000
Ånswer : B
PAS 17 provides that the discount rate to be used in calculating

the present value of the minimum lease payments is the interest
rate implicit in the lease, if this is practicable to determing,
if not, the lessee’s incremental borrowing rate shall be used.
2. Depreciation expense on leased truck for 2009 :

Cost P1,060,000
Less : Residual value 183,560
Depreciable cost 876,440
Lease term / 6 years
Annual depreciation P 146,073
Answer : A
PAS I7 states that “if there is no reasonable certainty that the

lessee will obtain ownership by the end of the lease term, the
asset shall be fully depreciated over the shorter of the lease
term and its useful life.”
Because neither the transfer of ownership nor bargain purchase

option is satisfied, the depreciation period is the term lease
term, being shorter than the asset’s economic life.
3. SCHEDULE OF LEAsE PAYMENTS AND INTEREST ACCRUALS

Interest Lease
Date Payment Expense Principal Liability
01.01.09 P1,060,000
01.01.09 P210,000 850,000
12.31.09 210,000 P102,000 P108,000 742,000
12.31.10 210,000 89,000 120,000 621,000
12.31.11 210,000 74,525 135,475 485,565

12.31.12 210,000 58,268 151,732 333,833
12.31.13 210,000 40,060 169,940 163,893
12.31.14 183,560 19,667 163,893 0
Lease liability, Dec. 31, 2012
Answer : D
4. Cost of leased truck (see no. 1) P1,060,000
Jan. 1, 2009-Dec. 31, 2013 (P146, 073 × 5) 730,365
Book value, Dec. 31, 2013 P 329,635
Answer : D
5. Depreciation expense (P329, 635 BV on

Dec. 31, 2013-P183, 560 salvage value) P146,075
Interest expense (see amortization schedule) 19,667
Loss on leased equipment :
Guaranteed residual value P183,560
Less : Realizable value of truck
at the end of the lease term 116,000 67,560
Total lease,-related expenses P233,302
Answer : A
PROBLEM 5-39
Accounting for Lensed Faci1itles

In 2008 TIMPANI TRUCKING COMPANY entered into a long-term lease
contract for newly constructed truck terminals and storage
facilities. The buildings were constructed to the company's
specifications on land owned by the company. Timpani took
possession of the leased properties on January 1, 2009. On
January 1, 2009 and 2010, the company made cash payments of P3,
144, 000.
Although the leased properties have a composite life of 40 years,

the noncancellable lease runs for 20 years from January 1, 2009,
with a bargain purchase option available upon expiration of 1 the
lease.
The 20-year lease is effective for the period January 1, 2009,

through December 31, 2028. Advance rental payments of P2, 700,
000 are · payable to the lessor on January 1 of each of the
first 10 years of the lease term. Advance rental payments of
P960, 000 are due on January 1 for each of the last 10 years of
the lease. The company has an option to purchase all of these
leased facilities for P1 on December 31, 2028. Also, the lease
contract stipulates that Timpani should make annual payments to
the lessor of P375 ; 000 for property taxes and P69, 000 for
insurance. The rate implicit in the lease is 6%. The company
depreciates its other depreciable assets using the straight line
method and uses the calendar year for. financial reporting
purposes.
Selected present value factors are as follows :
For an Ordinary
Period Annuity of 1 at 6 % For 1 at 6%
1 0. 943396 0. 943396
2 1. 833393 0. 889996
8 6. 209794 0. 627412
9 6. 801692 0. 591898
10 7. 360087 0. 558395
19 11. 158117 0. 330513
20 11. 469921 0. 311805
1. What is the total cost of the leased Facilities?
A. P28, 554, 192 C. P23, 817, 677
B. P25, 246, 737 D. P26, 937, 917
Assume that the present value of the minimum lease payments is

P25, 200, 000 on January 1, 2009.
2. What is the amount of interest expense to be shown on ·

Timpani's income statement for the year ended December 31,
2011?
A. P1, 350, 000 C. P1, 183, 140
B. P2, 452, 140 D. P1, 269, 000
3. The total lease-related expenses for the year ended Decembee

2012 should be
A. P1, 722, 128 C. P2, 257, 140
B. P2, 796, 128 D. P2, 166, 128
SOLUTION 5-39
1. Present value of first 10 payments :

Payment made on Jan. 1 2009 P2,700,000
Present value of succeeding 9
payments(P2,700,0006. 801692) 18,364,568 P21,064,568
Present value of last 10 payments ;
First payment P 960,000
Present value of succeeding
payments (P960, 000 × 6. 801692) 6,529,624
Present value of last 10 payments at
Jan. 1, 2019. · 7,489,624
Present value of 1 for 10 periods x0.558395 4,182,169
Cost of leased facilities P25,246,737
Answer, B
2. AMORTIZATION SCHEDULE (PARTIAL)
Executory Interest Lease

Date Payment Cost Expense Principal Liability
01.01.09 P25,200,000
01.01.09 P3,144,000 P444,000 P2,700,000 22,500,000
01.01.10 3,144,000 444,000 P1,350,000 1,350,000 21,500,000
01.01.11 3,144,000 444,000 1,269,000 1,431,000 19,719,000
01.01.12 3,144,000 444,000 1,183,000 1,516,860 18,202,140
01.01.13 3,144,000 444,000 1,092,000 1,607,872 16,594,268
Interest expense for 2011
(see amortization schedule)
Answer, C
3. Interest expense P1,092,128

Executory costs 444,000
Depreciation expense
(P25, 200, 000/40 * years) 630,000
Total lease-related expenses for 2012 P2,166,128
Ånswer, D
*Because the lease has a bargain purchase option, the leased

asset is depreciated over its economic life
PROBLEM 5-40
Impairment of Assets
VIELE COMPANY purchased a manufacturing plant building on January

L, 2001, for P2, 600, 000. The building has been depreciated
using the straight-line method with a 30-year useful life and
logo residual value, -Viele's manufacturing operations have
experienced significant losses for the past two years, so Viele
has decided that the manufacturing building should be evaluated
for possible impairment. On December 31, 2010, Viele estimates
that the building has a remaining useful life of 15 years, that
net cash inflow from the building will be P100, 000 per year, and
that the fair value less costs to sell of the building is P760,
000.
What amount of impairment loss should be recognized in 2010?
A. P320, 000 C. P973, 333
B. P O D. P1, 060, 000
SOLUTION 5-40
Cost of building P2,600,00
Less : Acclimulated depreciation
(P2, 600, 000 × 90%/30 × 10) 780,000
Carrying value, Dec. 31, 2010 1,820,000
Fair value less costs to sell 760,000
Impairment loss P1,060,000
Answer : D
PROBLEM 5-41
Impairment of Assets
KWLEDRUM COMPANY has a department that performs machining

operations on parts that are sold to contractors. A group of
machines had an aggregate carrying amount of P3, 690, 000 on
December 31, 2009. This group of machinery has been determined to
constitute a cash generating unit for purposes of applying PAS
36, Impairment of Assets. A cash generating unit as defined in
this standard is the smallest identifiable group of assets that
generates cash inflows that are largely independent of the cash
inflows from other assets or groups of assets.
Presented below · are data about future expected cash-inflows

and outflows based on the diminishing productivity expected of
the machinery as it ages and the increasing costs that will · be
incurred to generate out- · put from the machines.
Cost, excluding
Year Revenues Depreciation
2010 P2, 250, 000 P 840, 000

2011 2, 400, 000 1, 260,
000 2012 1, 950, 000 1, 650, 000
2013 600, 000 450, 000
Totals P7,200,000 P4,200,000
The fair value of the machinery in this cash generating unit, net
of estimated disposition costs, is determined to amount to P2,
535, 000. The company discounts the future cash flows of this
cash generating unit by using a 5% discount rate.
The following are lifted from the present value tables :
Present value of 1 at 5% for :
1 period 0. 95238
2 periods 0. 90703
3 periods 0. 86384
4 periods 0. 82270
5 periods 0. 78353
How much impairment loss should be recognized at December 31,

2009?
A. P1, 155, 000 C. P224, 427
B. P930, 573 D. P O
SOLUTION 5-41
COMPUTATION OF VALUE ÏN USE :
Year Net Cash Inflows PV Factor PV of Cash Flows
2010 P1, 410, 000 0. 95238 P1,342,856

2011 1, 140, 000 0. 90703 1,034,014
2012 300, 000 0. 86384 259,152
2013 150, 000 0. 82270 123,405
Total P2,759,427
Carrying amount of the cash generating unit P3,690,000
Value in use 2,759,427
Impairment loss P 930,573
Answer.B.
Because the value use exceeds the fair value less costs to see of
the cash generating unit (CGUI), it is used to represent the
CGU’s recoverable amount. The impairment loss of P930,573 is to
be included in the company’s operating expenses for 2009 ·
PROBLEM 5-42
Revaluation of PPE
BELLS COMPANY acquired a machine on January 1, 2003, at a · cost

of P120, 000. It was expected to have a useful economic life of
10 years. Bells uses the straight-line method in depreciating its
machinery and equipment and reports on a calendar year basis. On
December 31, 2010, the machine was appraised as having a gross
replacement cost of P150,000. Bells applies the revaluation model
in valuing, this class of property, plant and equipment after its
initial recognition.
How much should be credited to revaluation surplus on December

31, 2010?
A. P30, 000 C. P21, 000
B. P105, 000 D. P9, 000

SOLUTION 5-42
Replacement
Cost Cost Appreciation
Machinery P120,000 P150,000 P30,000
Accum.dep. (3/10) 36,000 45,000 9,000
Net (7/10) P84,000 P105,000 P21,000
The entry to record the revaluation is:
Machinery 30,000
Revaluation surplus 21,000
Or
Answer:C
PROBLEM 5-43
Revalutaion Model
On January 1, 2009, KHAEN CO. acquired two assets within the same
class of plant and equipment. Information on these assets is as
follows
Cost Expected Useful Life
Machine A P300,000 5 years
Machine B 180,000 3 years

The machines are expected to generate benefits evenly over their
useful lives. The class of plant and equipment is measured using
the revaluation model.
At December 31, 2009, information about the assets is as

follows :
Fair Value Expected Useful Life
Machine B 114,000 2 years
On July 1, 2010, machine B was sold for P87, 000 cash. On the
same day, Khaen acquired machine C for P240, 000 cash. Machine C
has an expected useful life of four years.
At December 31, 2010, information on the machines is as follows :
Fair Value Expected Useful Life
Machine C 205,000 1.5 years
1. The depreciation expense for 2009 is

A. P 1 20, 000 C. P165,000
B. P88, 400 D. P123,000
2. Ignoring income tax, the December 31, 2009, statement of

financial position of Khaen should show revaluation surplus at
A. P18, 000 C. P6, 000
B. P O D. P12, 000
3. The gain (loss) that should be recognized on the sale of-

machine B on July 1, 2010, is
A. P1, 500 C. P30, 000
B. P(27, 000) D. P O
4. The amount of revaluation toss to be reported on Khaen's
income statement for the year ended December 31, 2010, is
A. P16, 500 C. P9, 000
B. P25, 500 D. P4, 500
5. The depreciation expense for 2010 is
A. P123, 000 C. P160, 000
B. P121, 500 D. P114, 500
SOLUTION 5-43

Machine A (P300, 000/5) P60,000
Machine B (P180, 000/3) 60,000
Total P120,000
Answer : A
2. Revalued
Cost Amount Increase
Machine A P300,000 P315,000 P15,000
Accum.Dep(1/5) (60,000) (63,000) (3,000)
Net (4/5) P240,000 P252,000 P12,000
The revaluation decrease on machine B (see computation below)

should be reported as Revaluation loss (or Impairment loss) on
Khaen's income statement for the year ended December 31, , 2009.
Machine B
Bookvalue, Dec. 31 · 2009 (P180, 000×2/3) P120,000
Fair value 114,000
Revaluation decrease P (6,000)
3. Proceeds from sale of machine B P87,000

Carrying value, July · 1, 2010 :
Carrying value, Jan. 1, 2010 P114,000
Depreciation, Jan. 1-luly 1 (28,500) 85,500
(P114, 000/2 × 1/2)
Answer : A
4. Machine A
Carrying value, Dec. 31, 2010
(P252, 000 × 3/4) P189,000
Fair value 168,000
Revaluation decrease P(21,000)
Machine C
Carrying value, Dec. 31, 2010 (P240, 000 X 3.5/4) P210,000
Fair value 250,500
Revaluation loss for 2010 :
Machine A (P21, 000-P9, 000*) P 12,000
Machine B 4,500
Total P16,500
*Revaluation surplus, Dec, 31, 2009 P12,000
Piecemeal realization in 2010
(P12, 000x1/4) (3,000)
Balance, Dec. 31, 2010 P 9,000
Answer : A
5. Depreciation for 2010 :

Machine A (P252, 000/4) P 63,000
B (P114, 000/2 × 1/2) 28,500
C(P240, 000/4 × ½) 30,000
Total P121,500
Answer: B
PROBLEM 5-44
Revaluation of PPE
In the December 31, 2009, statement of financial position of

CLAPPERS, INC., the equipment was reported as follows :
Equipment (at cost) P1,500,000
P1,050,000
The equipment consisted of two machines : Machine A and. Machine

B. Machine A had a book value of P540, 000 at December 31, 2009
(cost, P900, 000), while Machine B was carried at P510, 000
(cost, P600, 000). Clappers depreciates its equipment over a ten-
year period using the straight-line method.
On June 30, 2010, Clappers decided to change the basis of

measuring the equipment from the cost model to the revaluation
model. Machine A was revalued to P540, 000 with an expected
useful life of six years, and Machine B was revalued to P465, 000
with an expected useful life of five yea rs.
At December 31, 2011, Machine A was assessed to have a fair value

of P489, 000 with an expected useful life of five years, while
Machine B's fair value was P409, 500 with an expected useful life
of four years.
1. What amount of revaluation increase (decrease) should be

recognized for Machine A on June 30, 2010?
A. P45, 000 C. P90, 000
B. P(-5, 000) D. P O

recognized for Machine B on June 30, 2010?
A. P(45, 000) C. p(15, 000)
B. P15, 000 D. P O
3. What amount of depreciation expense should be reported on
Clappers' income statement for the year ended December 31, 2011?
MachineA Machine B
A. P60, 000 P60, 000
B. 90, 000 76, 500
C. 72, 000 53, 250
D. 70, 500 78, 000

recognized for Machine A on December 31, 2011?
A. P O C. P6, 000
B. P(24, 000) D. P(6, 000)
5. The entry to revalue Machine B on December 31, 2011, should

inelude a debit to
A. Revaluation surplus of P9, 000
B. Revaluation surplus of P32, 250
C. Revaluation loss of P9, 000
D. Impairment loss of P32, 250
SOLUTION 5-44
1. Machine A
Book value, Dec. 31, 2009 P540,000
Depreciation, Jan. 1, 2010-June 30, 2010
(P900, 000 X 10% x 1/2) (45,000)
Book value, June 30, 2010 495,000
Fair value 540,000
Revaluation increase P 45,000
Answer: A
2. Machine B
Book value, Dec. 31, 2009 P510,000
Depreciation, Jan. 1, 2010-June · 30, 2010
(P600, 000 × 10% x 1/2) (30,000)
Book value, June 30, 2010 480,000
Fair value 465,000
Revaluation decrease P(15,000)
Answer : C
3. Depreciation expense-Machine A
Jan. 1, 2010-June 30, 2010 (see no. 1) P45,000
July 1, 2010-Dec. 31, 2010 (P540, 000/5x 1/2) 45,000
Total P90,000
Depreciation expense-Machine B
Jan. 1, 2010-June 30, 2010 ( see no. 2) P30,000
July. 1, 2-110-Dec. 31, 2010 (P465, 000/5 X1/2) 46,000
Total P76,500
Answer: B
4. Book value, June 30, 2010 P540,000

Depreciation July 1 – Dec.31(see no.3) (45,000)
Book value, Dec. 31, 2010 495,000
Fair value 489,000
Answer : D
5. Book value, June 30, 2010 P465,000

Depreciation, July 1-Dec. 31 (see no. 3) (46,500)
Book value, Dec. 31, 2010 418,500
Fair value 409,500
Journal entry (elimination approach):
Revaluation loss (or Impairment loss) 9,000
Machine B 55,500
Answer : C
PROBLEM 5-43
Revaluatìon of PPE
The statement of financial position of ANGKLUNG COMPANY on

December 31, 2010, showed the following property, plant, and
equipment items after recording depreciation :
Building P6, 000, 000
Accumulated depreciation (2, 000, 000) P4, 000, 000
Motor vehicle P2,400,000
Accumulated depreciation (800,000) 1,600,000
Angklung has adopted the révaluation model for thë valuation of

its PPE. This has resulted in the recognition in prior periods of
an asset revaluation surplus for the building of P280, 000. On
December 31, 2010, an independent appraiser assessed the fair
value of the building to be P3, 200, 000 and the vehicle to be
P1, 800, 000. Assume that the bùilding and the motor vehicle have
remaining useful lives of 25 years and 4 years, respectively,
with zero residual value. The company uses the straight-line
depreciation method. Ignore income tax implications.
1. The entry to record the revaluation of the building should
include a debit to
Revaluation Revaluation
Surplus Loss
A. P800, 000 P O
B. 280, 000 520, 000
C. 0 800, 000
D. 520, 000 280, 000
2. What is the depreciation for 2010?
A. P82, 000 C. P578,000
B. P461, 200 D. P560,000
SOLUTION 5-45
1.
Carrying Revalued
Value Amount Decrease
Building P6,000,000 P4,800,000 P1,200,000
Accum.dep(1/3) (2,000,000) (1,600,000) 400,000
Net(2/3) P4,000,000 P3,200,000 P 800,000
journal entry (elimination approach) :
Accumulated depreciation-building 400,000
Revaluation loss (P800, 000-P280, 000) 520,000
Building 1,200,000
Answer : B
2. Depreciation for 2010 :

Building (P3, 200, 000/25) P128,000
Motor vehicle (P1, 6100, 000/4 ) 450,000
Total P578,000
Answer : C
PROBLEM 5-46
Impairment Recovery
On January 1, 2009, KAZ00'COMPANY acquired a factory equipmEnt at

a cost of p150, 000. T. He equipment is being depreciated using
the straight-line method over its projected useful life of 10
years. On December 31, 2010, a determination was made that the
asset's recoverable amount was only P96, 000. Assume that this
was properly computed and that recognition of the impairment was
warranted. On December 31, 2011, the asset's recoverable amount
was determined to be PILL, 000 and management belièves that the
impairment loss previously recognized · should be reversed. You
have been asked to assist the company's accountant in the
application of · PAS 36, the standard on impairment of assets,
1. How much impairment loss should be recognized on December 31,

2010?
A. P54, 000 C, P24, 000
B. P9, 000 D. P 0
2. What is the asset's carrying amount on December 31, 2011?
A. P84, 000 C. P86, 400
B. P90, 000 D. P96, 000
3. What would have been the asset's carrying amount at December

31, 2011, had the impairment not been recognized in 2010?
A. P105, 000 C. P96, 000
B. P84, 000 D. P. 86, 400
4. How much impairment recovery should be reported in the 2011

income statement of Kazoo Company?
A. P27, 000 C. P6, 000
B. P O D. P21, 000
SOLUTION 5-46
1. Cost of equipment P150,000
Less : Accumulated depreciation, Dec. 31, 2010
(p150, 000/10 × 2) 30,000
Carrying value, Dec. 31, 2010 120,000
Recoverable value 96,000
Answer : C
2. Carrying value, Jan. 1, 2011 P96,000
Depreciation for 2011 (P96, 000/8years) 12,000
Carrying value, Dec. 31, 2011 P84,000
Answer : A
3.Pre-impairment carrying value on Dec. 31, 2011
(P150, 000 × 7/10)
Answer : A
4. Pre.-Impairment carrying value, Dec. 31, 2011
(see no. 3) P105,000
Actual carrying value, Dec. 31, 2011 (see no. 2) 84,000
Recovery of previously recognized impairment P 21,000
Answer : D
The asset cannot be restored to its indicated recoverable amount

of P111000 at Decmber 31, 2011 : as this excees the asset's
carrying amount of P105,000 that would have existed at this date
had the impairment in 2010 netter been recognized.
PROBLEM 5-47
Impairment Loss on Equipment Carried at Revalued Amount
KOTO, INC. purchased a machinery on January 1, 2009, at a cost of

P100, 000., It is being depreciated using the straight-line
method over its projected useful life of 10 years. At December
31, 2009, the asset's fair value was P112, 500. Accordingly, an
entry was made on that date to recognize the revaluation write-
up.
An impairment was detected on December 31, 20li, and the

recoverable amount of the asset was determined to · be P68, 000.
At December 31, 2012, the fair value of the asset was determined
to be P73, 000.
1. What amount of revaluation surplus should be credited directly

to equity on December 31, 2009?
A. P O C. P10, 000
B. P12, 500 D. P22, 500
2. What is the revaluation surplus balance at December 31, 2011,

before recognition of the impairment loss?
A. P17, 500 C. P5, 000
B. P22, 500 D. P O
3. The amount of impairment toss to be reported on Koto's income

statement for the year 2011 is
A. P19, 500 C. P17, 000
B. P2, 000 D. P O
SOLUTION, 5-47
1. Cost of machinery P100,000
Less : Accumulated depreciation, Dec. 31, 2009
(P100, 000/10) 10,000

Fair value 112,500
Revaluation surplus P 22,500
Answer : D
2. Revaluation surplus, Dec. 31, 2009 (see no. 1) P22, 500 .

Less : Realization through depreciation in 2010 and
2011 (P22, 500/9 × 2) 5, 000

Balance before impairment recognition, Dec. 31, 2011 p17,500
Answer : A
3.Fair value of machine at Dec. 31, 2009 P112,500
Less : Depreciation, 2010-2011 (P112, 500/9 × 2) 25,000
Carrying value, Dec. 31, 2011 87,500
Less : Recoverable value 68,000
Decrease in value 19,500
Less : Revaluatiòn surplus 17,500
Answer : B
PROBLEM 5-48
Depletion and Depreciation
In 2006, SAHNAI MINING COMPANY purchased property with natural

resources for P12, 400, 000. The property was relatively close to
a large city and had an expected residual value of P3, 000, 000.
However, P1, 200, 000 will have to be spent to restore the land
for use.
The_following information relates to the use of the property :
a) in 2006, Sahnai spent P800, 000 in development costs and

P600, 000 in. Buildings. On the property. Sahnai does not
anticipate that the buildings will have any utility after
the natural resources are depleted.
b) In 2007 and 2009, P600, G00 and P1, 600, 000, respectively,
were spent for additional developments on the mine.
C) The tonnage mined and estimated remaining tons for years 2006-
2010 are as follows :
Year Tons Extracted Estimated Tons Remaining
2006 0 5,000,000
2007 1,500,000 3,500,000
2008 1,800,000 2,000,000
2009 1,700,000 900,000
2010 900,000 0
Based on the preceding information, calculate the depletion and.

Depreciation for :
1. 2007
Depletion Depreciation
A. P3, 600, 000 P180,000

B. 3, 240, 000 420,000
C. 3, 600, 000 420,000
D. 3, 240, 900 180,000
2. 2008
A. P4, 149, 474 P378,000
B. 4, 149, 474 198,000
C. 3, 978, 000 198,000
D. 3, 978, 000 378,000
3. 2009
A. P2, 891, 308 P154,000
B. 3, 944, 000 153,000
C. 2, 981, 308 274,615
D. 3, 944, 900 274,615
4. 2010
A. P3, 944, 000 153,000
B. 3, 944, 000 69,000
C. 2, 078, 000 153,000
D. 2, 078, 000 69,000
SOLUTION 5-48
1. DEPLETION FOR 2007
Cost of land P12,400,000
2006 development cost 800,000
2007 development cost 600,000
Total 13,800,000
Less : Residual value, net of restoration costs
(P3, 000, 000-P1, 200, 000) 1,800,000
Depletable cost P12,000,000
Estimated reserve / 5,000,000
Depletion rate per ton P2.40
Multiply by tons extracted 1,500,000
Depletion for 2007 P3,600,000

DEPRECIATION FOR 2007
Building cost P 600,000
Depreciation rate per ton P0.12
Answer : A
2. DEPRECIATION FOR 2008

Remaining depletale cost
(P12,000,000-P3,600,000) P8,400,000
New Depreciation rate per ton P2.21
Depreciation for 2008 P 3,978,000
Book value of (P600,000-P180,000) P 420,000

Depreciation for 2008 P 198 ,000
Answer : C
3. DEPRECIATION FOR 2009

Book value of
(P12,000,000-P3,600,000-P3,978,000) P 4,422,000
2009 development cost 1,600,000
Total remaining depletable cost P6,022,000

Depreciation for 2009 P 3,944 ,000
Book value of
(P600,000-P180,000-P198,000) P 222,000
Depreciation for 2009 P 153 ,000
Answer : C
4. DEPLETION FOR 2010
Remaining depletable cost at the
beginning of 2009 P6, 022, 000
Less : 2009 depletion 3, 944,000
Depletion for 2010 P2, 078, 000
Book value of building, beginning of 2009 P222,000
Less : Depreciation for 2009 153,000
Answer : D
The depreciation and depletion for 2010 are the bookvalues of

the properties at the end of 2010 because the resources are all
used at the end of 2010.

Chapter 5: Audit of Property, Plant & Equipment

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Chapter 5: Audit of Property, Plant & Equipment

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Chapter 5: Audit of Property, Plant & Equipment

FOR PROPERTY, PLANT AND EQUIPENT

1. All property, plant and equipment on the statement of

EXAMINATION OF OPENING BALANCES

1. For a recurring engagement:

EXAMINATION OF CURRENT YEAR TRANSACTIONS

1. Obtain or prepare schedules of the property, plant and

and determine proper accounting recognition.

11. Reconcile payments to government for taxes and

Correction of Improper property, plant and equipment (PPE)

The following are PPE acquisitions for selected companies:

1. FRENCH HORN COMPANY acquired land, buildings, and equipments

2. TRUMPET, INC. purchased factory equipment by making a

Factory equipment 530,000

3. TUBA CO purchased store equipment for P800,000, terms 2/15,

Store equipment 800,000

4. FLUTE CORP. constructed a building at a total cost of

(on acquisition date)

Fair Allocated Amount

Land P 600,000 P 525,000 P 600,000

Buildings 1,400,000 1,225,000

Equipment 1,200,000 1,050,000

Totals P 3,200,000 P2,800,000

The total acquisition price of assets acquired at a lamp sum

2. Interest Payable 30,000

The interest on the note payable issued should be recognized as

3. Purchase discount 16,000

An item of PPE acquired on credit for an account should be

4. Profit on construction 2,000,000

The cost of a self-constructed asset is determined by applying

The “profit” recognized by the company is actually a saving on

Acquisition of Equipment on a Deferred Payment Basis

SAXOPHONE COMPANY acquires a new manufacturing equipment on

1. What is the acquisition cost of the equipment

1. Acquisition cost of equipment

PAS I6 (Property, Plant and Equipment) States that the cost of

The entry to record the acquisition is:

Discount on note payable 1,034,160

Note payable 3,104,106

3. Interest expense for 2009:

4. Interest expense for 2010:

5. Carrying value of note, on Dec. 31, 2009(see no.4)

OBOE CORP., acquired land and an old building in exchange for

Legal fees to complete the transaction P150,000

1. What is the total cost of the building purchased by Oboe

1. In acquiring the property, Oboe Corp., did not intend to use

2. Market value of ordinary shares

Total cost of land 131,000

If equity securities (e.g., ordinary should be exchange for

Purchased and Self-constructed Equipment

Various equipment used by BASSOON CO. in its operation are

Materials and purchased parts at gross invoice price

(Bassoon failed to take the 2% cash discount) P450,000

Imputed interest on funds used during construction

(stock financing) 36,000

Labor costs 185,000

Overhead costs(fixed-P40,000; variable- P60,000) 100,000

Gain on self-construction 74,000

Installation cost 8,600

Store equipment (purchased):

Cash paid for equipment P 175,000

Freight and insurance cost while in transit 3,500