Correcting Entries for PPE

The following are PPE acquisitions for selected companies:

a. French Horn Company acquired land, buildings and equipment from a financially distressed
company, Bankrupt Corp. for a lump sum price of P 2,800,000. On the acquisition date,
Bankrupt’s assets had the following book and fair values:

BV FV
Land P 800,000 P 600,000
Building 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

b. Trumpet, Inc. purchased factory equipment by making a P 200,000 cash down payment and
signing a 3-year P 300,000 10% notes payable. The acquisition was recorded as follows:

Factory equipment 530,000

Cash 200,000
Note payable 200,000
Interest payable 30,000

c. Tuba Co. purchased store equipment for P 800,000, terms 2/10, N/30. The company took the
discount and made the following entry when it paid for the stock acquisition:

Store equipment 800,000

Cash 784,000
Purchase discount 16,000

d. Flute Corp. constructed a building at a total cost of P 43M. The building could have been
purchased for P 45M. The company’s controller made the following entry:
Building 45M
Cash 43M
Profit on construction 2M

Prepare the necessary adjusting entries for each acquisition.

A. FV
Land P 600,000
 Building 1,400,000
Equipment 1,200,000
TOTAL P3, 200,000

LAND P525, 000 (P600, 000/P3, 200,000=18.75% x P2, 800,000) - P600, 000 = (P75,000)

BUILDING P1,225,000 (P1,400,000/P3,200,000=43.75% x P2,800,000) - P1,000,000 = P225,000

EQUIPMENT P1,050,000 (P1,200,000/P3,200,000=37.5% x P2,800,000) - P1,200,000 = (150,000)

Building P225, 000

Land P75, 000

Equipment 150,000

B. P300,000 x 10%= P30,000

Interest Payable P30, 000

Factory Equipment P30, 000

C. P800,000 x 2%=P16,000

Purchase Discount P16, 000

Store Equipment P16, 000

D. Can be Purchased P45M – Total Cost P43M= P2,000,000

Profit on construction P2, 000,000

Building P2, 000, 000

Depreciation and Error Correction

The Delivery trucks account of your client, Alphorin Company, had a balance of P 2,820,000 on January
1, 2014, which included the following:

Truck No. Acquisition Date Cost

1 January 1, 2011 P 540,000
2 July 1, 2011 P 660,000
3 January 1, 2013 P 900,000
4 July 1, 2013 P 720,000
P 2,820,000
The accumulated depreciation – Delivery trucks account had a balance of P 906,000 on January 1, 2014.
This amount represents depreciation on the four trucks from the respective dates of acquisition, based
on a 5-year life, no salvage value. No charges had been made against this account before January 1,
2014.

Transactions completed during the period January 1, 2014 through December 31, 2017, and the entries
made to record they were as follows:

July 1, 2014
Truck No. 3 was traded for a larger one (Truck No. 5), the agreed price of which was P 1,020,000.
Alphorn paid the dealer P 500,000 cash on the transactions. The entry was:
Delivery trucks 500,000
Cash 500,000

January 1, 2015
Truck No. 1 was sold for P 110,000. The entry was:
Cash 110,000
Delivery trucks 110,000

July 1, 2016
A new truck (no.6) was purchased for P 1,080,000 cash and was debited at that amount to the Delivery
trucks account. (Assume Truck No. 2 was not retired)

July 1, 2016
Truck No. 4 was severely damaged in an accident and was sold for junk for P 21,000 cash. Alphorn
received P 75,000 from the insurance company. The entry made by the accountant was:
Cash 96,000
Sales 21,000
Delivery trucks 75,000

Entries for depreciation had been made at the end of each year as follows:
Year Depreciation Expense
2013 P 609,000
2014 P 633,000
2015 P 733,500
2016 P 834,000

1. What amount of gain (loss) should have been recognized on the trade in of Truck No. 3 on July 1,
2014?
Solution:
P1, 020,000 agreed price – 500,000 paid cash=P520, 000 FAIR VALUE
P900, 000 Cost – 270,000(900k/5years x 1 1/2years) =P630, 000 Current Asset
P630,000 CA - P520,000 FV =P110,000 on trade 07/01/2014

2. Alphorn’s net income for 2014 was overstated (understated) by?

Solution:
Truck No. Cost
1 P 540,000 / 5 P108, 000
2 P 660,000/5 132,000
3 P 900,000/5 x 6/12 90,000
4 P 720,000/5 144,000
5 P1, 020,000/5x6/12 102,000
CORRECT DEPRECIATION P576, 000
P576, 000 total dep - P633, 000 2013 dep = (P57, 000) Dep over-NI under
P57, 000(NI-under)- P110, 000 Unrecorded Loss (NI- over) = P53, 000 Overstated Net Income

3. The gain (loss) on the sale of truck No. 1 on January 1, 2015 was?
Solution:
P540, 000 – P432, 000 (540k/5 x 4(2011-2014)) =P108, 000 CA 01/01/15
P108, 000 CA- P110, 000 sold =P 2,000 Gain on sale 1/1/15

4. Alphorn’s net income for 2015 was understated by?

Solution:
Truck No. Cost
1 SOLD
2 P 660,000/5 132,000
3 SOLD
4 P 720,000/5 144,000
5 P1, 020,000/5 204,000
CORRECT DEPRECIATION P480, 000

P480, 000 - P733, 500 DEP 2015 =P253, 500(dep over, NI-under) +2,000 Unrecorded Gain

=P255, 000 Understated Net Income

5. What amount of loss should have been recognized on the sale of truck No.4 on July 1, 2016?
Solution:
Truck 4 P720, 000 cost - P432, 000 (720k/5yrs x 3yrs expired)
=P288, 000 CA 07/1/2016 – P21, 000 sold= P267, 000 Loss on Sale

6. Alphorn’s net income for 2016 was overstated (understated) by

Solution:
Truck No. Cost
1 SOLD
2 P 660,000/5 x 6/12 66,000
3 SOLD
4 P 720,000/5 x 6/12 72,000
5 P1, 020,000/5 204,000
6 P1, 080,000/5x 6/12 108,000
CORRECT DEPRECIATION P450, 000
P450, 000-834,000=P384, 000(depreciation over, NI under)
(267,000) loss
54,000 Gain in insurance (75k-21k sold)
P171, 000Understated Net Income

7. What amount of depreciation should have been recorded in 2017?

SOLUTION:
New Trucks
5 P1, 020,000/5 P204, 000
6 P1, 080,000/5 216,000
Depreciation Expense 2017 P420, 000

Acquisition and Depreciation of Various PPE Items

Bagpipe Manufacturing Company began operations on October 1, 2014. 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 depreciation, 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 record and personnel.

a. Bagpipe computes depreciation from the first month of acquisition to the first month of the
month of disposition.
b. Land A and Building A were purchased from Pobre Company. Bagpipe paid P 12,300,000 for the
land and building together. At the time of acquisition, the land had a fair value of P 1,350,000
and the building had a fair value of P 12,510,000.
c. Land B was acquired on October 3, 2014, in exchange for 37,500 ordinary shares of Bagpipe, On
the acquisition date, Land B had a fair value of P 1,365,000 and the company’s P 5 par value
ordinary shares had a fair value of P 35 per share.
d. Construction of Building B on the newly acquired land began on October 1, 2015. By September
30, 2016, Bagpipe had paid P 4,800,000 of the estimated total construction costs of P 6,750,000.
It is estimated that the building will be completed and occupied by July 2017.
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 P
450,000 and the salvage value at P 45,000.
f. Machinery A’s total cost of P 2,473,500 includes installation cost of P 9,000 and normal repairs
and maintenance of P 223,500. Salvage value is estimated at P 900,000. It was sold on February
1, 2016 for P 1,600,000.
g. On October 1, 2015, Machinery B was acquired with a down payment of P 86,100 and the
remaining payments to be made in 11 annual installments of P 90,000 each, beginning October
1, 2015. The prevailing interest rate was 8%. The following data were abstracted from present
values (rounded):
 10 years 11 years 12 years

PV of 1 at 8% .463 .429 .315

PV of an ordinary annuity of 1 at 8% 6.710 7.139 8.559

Land A: Acquisition date: October 1, 2014

Building A:

Acquisition date: October 1, 2014

Salvage value: P 600,000
Depreciation method: Straight line
Depreciation expense
Year ended 9/30/15 P 261,750

Land B: Acquisition date: October 3, 2014

Building B

Acquisition date: Under construction

Cost: P 4,800,000 to date
Depreciation method: Straight line
Salvage value: P0
Estimated useful life: 30 years
Depreciation expense
Year ended 9/30/15 P0

Donated equipment:
Acquisition date: October 2, 2014
Salvage value: P 45,000
Depreciation method: 150% declining balance
Estimated life: 10 years

Machinery A
Acquisition date: October 2, 2014
Salvage value: P 90,000
Estimated life: 8 years
Depreciation method: SYD

Machinery B
Acquisition date: October 1, 2015
Salvage value: P0
Depreciation method: straight line
Estimated life: 20 years.

1. What is the cost of Land A?

Solution:
 Land A P12, 300,000 x 1,350/13,860=P1,198,052 Cost of Land A
1,350,000 Land A+ 12,510,000Building A= P13, 860,000

2. What is the cost of Building A?

Solution:
Building A P12, 300,000 x 12,510/13,860=P11, 101,948 Cost of Building
1,350,000 Land A+ 12,510,000Building A= P13, 860,000

3. What is the estimated useful life of Building A?

Solution:
P11, 101,948 – 600,000 /? Useful life = P 261,750 Dep expense
P10, 501,948 / P 261,750 Dep expense=40 Years’ useful life

4. What is the depreciation expensed on Building A for the year ended Sept. 30, 2016?
Solution:
P261, 750 Depreciation expense 09/30/2016

5. What is the cost of Land B?

Solution:
Land B fair value P 1,365,000
Order of priority

6. What is the depreciation expense on Building B for the year ended Sept. 30, 2016?
Solution:
P0 Depreciation expense 09/30/2016

7. At what amount should the donated equipment be measured and recognized?

Solution:
P450, 000 Fair value of Donated equipment

8. What is the depreciation expense on the donated equipment for the year ended Sep. 30, 2015?
Solution:
Double declining 150% / 10 years =15% x P450, 000= P67, 500 Depreciation expense 09/30/15

9. What is the depreciation expense on the donated equipment for the year ended Sep. 30, 2016?
Solution:
*P450, 000 – 67,500=P382, 500 CA 09/30/16
Double declining 150% / 10 years =15% x P382, 500=P57, 375 Depreciation expense 09/30/16

10. What is the cost of Machinery A?

Solution:
P 2,473,500 Cost - P 223,500 normal repairs and maintenance = P2, 250,000 Cost of Machinery
A

11. What is the depreciation expense on Machinery A for the year ended Sept. 30, 2015?
Solution:
 1+2+3+4+5+6+7+8=36
P2, 250,000 – 90,000=P2, 160,000 x 8/36=P480, 000 Depreciation expense 09/30/15

12. What is the depreciation expense on Machinery A for the year ended Sept. 30, 2016?
Solution:
P2, 160,000 x 7/36 x 4/12 =P140, 000 Depreciation expense 09/30/16

13. What amount of gain (loss) should be recognized on the sale of Machinery A on Feb. 1, 2016?
Solution:
P2, 250,000 cost – P620, 000accum dep (480k+140k) =P1, 630,000 CA – P1, 600,000sold
=P30, 000 Loss on sale of Machinery A

14. What is the cost of Machinery B?

Solution:
P86, 100 Cash + P90, 000annual payment + P603, 900 PV (90,000 x 6.710)
=P780, 000 Cost of Machinery B

15. What is the depreciation expense on Machinery B for the year ended Sept. 30, 2016?
Solution:
P780, 000 Cost /20 years=P39, 000 Depreciation expense of Machinery B